USD/CAD Forecast: Scotiabank Sees Little Support Before 1.40
The Canadian Dollar is recovering as US yield support fades, but Scotiabank’s fair-value estimate now sits close to the market after USD/CAD retreat.
The US Dollar to Canadian Dollar (USD/CAD) exchange rate slipped further on Friday, with FX strategists at Scotiabank warning of little technical support before 1.40 after the pair broke below 1.4200.
USD/CAD traded near 1.4152 at the time of writing, down 0.29% from Thursday’s close and almost 0.9% below Monday’s closing level.
Dollar to Canadian Dollar (USD/CAD): 1.41525 (-0.29%)
Euro to Canadian Dollar (EUR/CAD): 1.592321 (+0.04%)
Scotiabank’s latest short-term assessment is neutral/bearish.
Describing the earlier North American session, the bank said: “The CAD is entering Friday’s NA session with a modest gain, up 0.2% vs. the USD while showing losses on the crosses against most of the G10 currencies in an environment of broad-based USD weakness and a market tone that is suggestive of risk appetite.”
That leaves the Canadian currency vulnerable to a reversal in the wider Dollar sell-off, even as domestic interest-rate expectations offer more support.
Canadian rate expectations narrow the US advantage
Scotiabank links the improved domestic support to the bond market:
“Rate expectations have firmed modestly on the week, delivering a welcome narrowing in US-Canada yield spreads in a manner that has pressured our USDCAD FV estimate over the past week or so. FV is currently estimated at 1.4140, largely closing the gap to spot.”
A smaller US yield advantage can reduce the incentive to hold US Dollars rather than Canadian Dollars.
But at 1.4140, the bank’s fair-value estimate is only around 12 pips below the latest market rate, leaving little further Canadian Dollar upside on that measure alone.
A decline to 1.40 would therefore go beyond the adjustment implied by its current valuation estimate.
The Bank of Canada’s next decision and Monetary Policy Report are due on 28 October.
In its morning assessment, Scotiabank said “markets are currently pricing 9bpts of tightening with 23bpts expected by December.”
That indicates some tightening is anticipated this month, with almost a quarter-point increase priced cumulatively by December, rather than a confirmed decision to raise rates.
Friday’s housing starts release showed construction rising 3% in September to an annualised 248,896 units, although the six-month trend was virtually flat.
Limited support before 1.40, with political risk ahead
The chart assessment points to more room for a decline than the valuation model.
Scotiabank says “the recent bearish turn in USDCAD is notable, with a sharp reversal from local peaks around 1.4300.”
“The extension below 1.4200 is important, with a move that has seen a sharp moderation in bullish momentum dragging the RSI back to the neutral threshold at 50.”
The Relative Strength Index measures momentum, so a reading near 50 suggests the previous upward impulse has faded rather than that the pair is already oversold.
The latest assessment follows our earlier coverage of Scotiabank’s concerns about stretched USD/CAD momentum.
Scotiabank says: “We see limited support between current spot and 1.40. Resistance is now expected above 1.4200.”
A sustained rebound above that resistance would weaken the case for an immediate slide towards 1.40.
The downside reference is roughly 1.1% below the current rate, although Monday’s Alberta vote could complicate the Canadian Dollar’s progress.
Scotiabank also warns: “Near-term domestic risk is elevated into Monday’s Alberta vote on the possibility of a future referendum.”
The provincial government’s explanation of the separation question makes clear that voters are choosing whether to begin the legal process for a later binding referendum: “The referendum question does not directly trigger Alberta separating from Canada.”
USD/CAD Exchange Rate FAQ
Could USD/CAD fall to 1.40?
Scotiabank sees limited technical support before 1.40, but this is a downside reference rather than a dated forecast target.
Where is USD/CAD resistance?
Scotiabank expects resistance above 1.4200 following the reversal from local peaks around 1.4300.
What is Scotiabank’s fair-value estimate?
The bank estimates fair value at 1.4140, close to Friday’s market rate of 1.4152.
