CAD Could Rebound as USD/CAD Upswing Nears 1.39

Key Moments

CAD Lags Despite Broad-Based USD Weakness

Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar (CAD) has shown only marginal strength against the US Dollar (USD), even as the USD weakens across major currencies. They observe that the CAD is entering Wednesday’s North American session with only a slight gain compared with its G10 peers.

The strategists emphasize that broader market forces are currently in play and that these dynamics could open the door for a more substantial CAD rebound following its 1.4% decline in the first quarter. They note that options markets are echoing this shift in sentiment, as pricing for protection against CAD weakness has started to fade.

Perceived Undervaluation Against Fair Value

According to Osborne and Theoret, the CAD continues to trade at a discount relative to their assessment of its underlying fundamentals. They point to a fair value (FV) estimate for USD/CAD of 1.3495, which they say underscores a significant gap compared with current market pricing.

The divergence between spot and their fair value estimate is central to their constructive view on the CAD, as they continue to highlight what they see as a meaningful undervaluation.

USD/CAD Momentum Shows Signs of Tiring

The strategists describe the recent USD/CAD advance as looking fatigued, with momentum indicators no longer signaling overbought conditions. They highlight that the Relative Strength Index (RSI) has slipped back below the 70 threshold, reflecting a loss of upside momentum.

On the technical front, they point to a notable pattern in the daily chart: a bearish reversal formation at a key retracement level. This pattern appears at a level aligned with the 61.8% retracement of the Sept 2024-Feb 2025 rally at 1.3944, reinforcing their view that the latest move higher may be running out of steam.

Key Technical Levels and Near-Term Outlook

The move back below 1.3900 in USD/CAD is described as a significant development by Osborne and Theoret. They see only modest support before 1.3850, suggesting that this area could be an important near-term reference point for traders.

Looking ahead, the strategists expect USD/CAD to trade within a relatively tight band in the short term, identifying a range between 1.3850 and 1.3950 as their preferred framework for near-term price action.

“The CAD is entering Wednesday’s NA session with a fractional 0.1% gain vs. the USD, lagging its G10 peers in an environment of broad-based USD weakness.”

“Broader developments are dominating, opening up the potential for a meaningful recovery in the CAD following a disappointing 1.4% decline in Q1. Risk reversals are confirming the shift in broader market sentiment and fading the premium for protection against CAD weakness (USD/CAD upside).”

“We continue to highlight the CAD’s meaningful undervaluation to our assessment of its fundamental equilibrium estimate. Our FV for USD/CAD is currently at 1.3495, revealing a significant divergence to spot.”

“USD/CAD rally is showing signs of exhaustion with momentum pulling back from overbought levels as the RSI drifts back below 70. Tuesday’s candle chart reveals a bearish reversal signal—a ‘shooting star’ doji—at levels corresponding to the 61.8% retracement of the Sept 2024-Feb 2025 rally at 1.3944.”

“The drift below 1.3900 is important, and we see limited support ahead of 1.3850. We look to a near-term range bound between 1.3850 and 1.3950.”