Canadian Dollar: Bullish Turn Targets 1.40 per USD – Scotiabank

USD/CAD has retreated from recent highs, now trading near 1.41381. Scotiabank strategists Shaun Osborne and Eric Theoret noted in their latest report that the Canadian dollar is receiving a modest boost, driven by a repricing of market expectations for Bank of Canada interest rates and a narrowing in U.S.-Canada Treasury yield spreads. The report estimates that USD/CAD's fair value is close to current spot levels, around 1.4140.

**Narrowing Spreads Provide Short-Term Support**

The strategists believe that the Canadian dollar's previous underperformance largely stemmed from the Bank of Canada's more dovish policy stance relative to the Federal Reserve. Now, with firmer rate expectations, this disadvantage has been partially repaired, pushing the exchange rate back toward fair value. However, market news shows that crude oil prices have recently hovered at lows, weakening upside momentum for the commodity-linked Canadian dollar and limiting the scope for a rebound in the exchange rate.

**Technical Picture Suggests Further Room for Pullback**

On technical charts, USD/CAD has shown overbought pressure after hitting a cyclical high of 1.4292 earlier, with the relative strength index and stochastic indicators both retreating from highs. The pair has initially broken below a steep uptrend line, and a further loss of the 1.42 level could trigger a more pronounced correction. Scotiabank strategists target a bullish move in the Canadian dollar toward 1.40 per U.S. dollar, which aligns with the next key support zone mentioned in technical analysis. Subsequent support can be referenced at 1.39 and 1.3750 levels.

**Focus on Canadian Employment Data for Direction**

Near-term direction will hinge on upcoming Canadian September employment data. If the data reinforces hawkish expectations for the Bank of Canada's rate outlook, the Canadian dollar could extend its corrective move; conversely, if the data is weak, USD/CAD may regain buying support above 1.42, with upside resistance at 1.43 and 1.4350.