Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar (CAD) has experienced modest relief against the US Dollar (USD) as front-end US/Canada spreads have narrowed by approximately 10 basis points from last week’s peak, following a period of sustained widening since the start of May [1]. Despite this narrowing, rate differentials remain punitive for the CAD, and the strategists assess that USD/CAD is currently trading close to their fundamental fair value estimate of 1.4135 [1].
Positioning indicators suggest the US Dollar is extremely overbought, with the daily RSI peaking near 89 last week—its highest level in at least 20 years—and spot trading two standard deviations above its 40-day moving average [1]. These technical signals imply limited further upside for the USD, with Scotiabank seeing potential gains capped around 1.4250/1.43 and the possibility of a modest retracement to 1.4075/80 [1].
While the CAD has posted minor net gains in late-week trading, supporting the idea of stabilization after its recent decline, Scotiabank notes there is little evidence of technical strength for the CAD in the short term [1]. The strategists maintain a neutral to bearish outlook, emphasizing that the current relief is modest and largely driven by the retreat in spreads rather than any fundamental improvement for the CAD [1].
CONCLUSION
The Canadian Dollar has stabilized modestly as US-Canada rate spreads narrow, but Scotiabank sees limited upside for the US Dollar given its extremely overbought condition. Market participants should expect only minor retracement in USD/CAD, with no strong technical signals favoring the CAD in the near term.