Key Moments
- Scotiabank notes the Canadian Dollar is modestly stronger against a generally softer USD, supported by resilient risk appetite despite weaker crude prices.
- Strategists estimate USD/CAD is trading well above an assessed fair value of 1.3375, with limited downside risk for the CAD.
- Technical signals indicate firm short-term support for USD/CAD in the low 1.35 area, reinforced by a bullish hammer pattern on the daily chart.
CAD Backed by Risk Sentiment and Swap Spread Moves
Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar is slightly firmer as it benefits from a softer US Dollar backdrop. They point out that the impact of lower crude prices has been counterbalanced by a rebound in risk appetite.
According to the analysts, the Canadian Dollar has also gained marginal support from slightly narrower 1-year swap spreads over the past week. However, they caution that the currency may lack a clear directional trend as market focus shifts away from geo-political concerns for the time being.
Valuation: Spot Remains Above Estimated Fair Value
Osborne and Theoret emphasize that, despite the CAD’s resilience, the USD/CAD spot rate is still trading notably above their model’s estimated fair value. They place that fair value at 1.3375, while noting that it may take some time for recent market volatility to be fully reflected in the model.
| Metric | Comment |
|---|---|
| Estimated fair value for USD/CAD | 1.3375 (model-based estimate) |
| Recent spot trading area | Well above the 1.3375 estimate |
| 1Y swap spreads | Slightly narrower over the past week, aiding CAD |
They stress that, “At the very least, the risk of a sharp fall in the CAD looks limited at this point.” The combination of valuation and market positioning leads them to judge that downside risk for the Canadian currency is constrained.
Technical Picture: Consolidation and Support Levels
From a technical standpoint, the strategists describe USD/CAD as trading within a broader consolidation phase that has been in place since the start of February. In this context, they see only limited room for additional USD appreciation.
They highlight that recent spot declines have stalled just below previously identified support at 1.3530. In addition, they note that a bullish “hammer” pattern formed on the daily chart yesterday, which they interpret as reinforcing support for USD/CAD in the low 1.35 area in the near term.
As a result, Scotiabank’s view is that this low 1.35 zone currently represents firm support for the pair, even as broader consolidation dynamics continue to limit the scope for significant USD gains.
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