Key Moments
- Scotiabank notes the Canadian Dollar is weakening as US Dollar strength pushes USD/CAD away from their fair value estimate.
- Strategists see a sizable valuation gap, yet still regard spot levels above 1.37 as attractive for USD sellers.
- Key resistance is identified in the low 1.38 area, with additional resistance at 1.3930 and support at 1.3650/75.
CAD Under Pressure Amid Valuation Dislocation
Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar (CAD) is weakening as persistent US Dollar (USD) strength drives USD/CAD further away from their assessed fair value. They point to a substantial valuation discrepancy that has widened due to softer terms of trade and lower Oil prices.
According to the strategists, the fair value or equilibrium estimate for USD/CAD has moved slightly higher, reflecting the change in underlying fundamentals, yet the divergence between spot and this estimate remains pronounced.
Strategists Maintain View on Value for USD Sellers
Despite the pressure on the CAD, the team still considers current levels advantageous for those looking to reduce USD exposure when USD/CAD trades above 1.37. They emphasize that, under normal circumstances, a valuation gap of this magnitude – described as being well above one standard deviation – would typically support a strong expectation for spot to revert toward fair value.
Technical Backdrop: Overshoot Risk and Key Levels
The strategists characterize their stance as “Neutral/bullish” on USD/CAD, noting that a recent move by the pair beyond the mid-1.37 area has increased the likelihood of an extension into the 1.3800/10 zone. While it remains uncertain whether the lower 1.38 region will be sufficient to halt further USD gains, they highlight several longer-term moving averages situated slightly above that area which could moderate upside momentum.
Specifically, they note that the 200-day moving average stands at 1.3804, and the 50-week moving average is at 1.3803. Above the low 1.38 region, additional resistance is seen at 1.3930, while support is identified in the 1.3650/75 area.
| USD/CAD Level | Technical / Strategic Significance |
|---|---|
| 1.37+ | Area viewed as offering value for USD sellers |
| 1.3800/10 | Zone flagged as potential “overshoot” target |
| 1.3803 | 50-week moving average |
| 1.3804 | 200-day moving average |
| Low 1.38s | Cluster of longer-run moving average resistance |
| 1.3930 | Resistance above the low 1.38 area |
| 1.3650/75 | Support zone |
The strategists conclude that, although a near-term reprieve for the CAD appears unlikely, the current configuration of valuation and technical levels continues to suggest opportunities for investors seeking to sell USD at higher levels.
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