Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar (CAD) has demonstrated resilience during recent volatility driven by events in Iran, extending its rebound even as the US Dollar (USD) exhibited mixed performance against major currencies [1]. The strategists note that negative sentiment towards the CAD is moderating, and the cost of topside USD protection in options has decreased, with USD/CAD risk reversals for three-month tenors now trading at a 0.15 volatility premium for calls over puts—half the premium seen two weeks prior and the lowest in nearly a month [1].
This decline in the premium for USD calls indicates that markets have absorbed the early July USMCA developments without significant disruption and may suggest modest upside potential for the CAD [1]. However, the strategists emphasize that for the CAD to improve further, interest rate spreads need to narrow rather than merely stabilize [1].
Technically, the CAD's condition remains largely unchanged despite overnight gains, with recent consolidation persisting. The USD is described as extremely overbought, and Scotiabank expresses confidence that the 1.4250/00 range should continue to provide strong resistance to further USD advances. A break below support at 1.4150 would be considered bearish and could prompt a test of the next key support at 1.4075/80 [1].
CONCLUSION
The Canadian Dollar has shown resilience amid recent volatility, with moderating negative sentiment and a declining premium for USD protection suggesting the CAD's recent slide may have paused. Technical resistance levels remain key, and further CAD improvement may depend on narrowing spreads. Market participants appear to have absorbed recent developments without significant disruption.