The Canadian Dollar is losing ground as USD/CAD pushes into overbought territory. Scotiabank sees limited room for more gains and points to resistance near 1.4200.
Traders watched USD/CAD climb for a fourth day straight. The pair closed Friday at 1.4140, up 1.1% for the week. Momentum is fading. Technical signals are flashing red. The loonie is now on its third weekly slide. This is its worst week since March. Over the period, the Canadian Dollar dropped 1.2%. USD/CAD hovered near 1.4152, based on Reuters data. The US Dollar's run looks stretched. Scotiabank says the loonie is now only a little undervalued.
Momentum and rate expectations
Scotiabank's latest note points to a key problem. The gap between US and Canadian interest rates has pulled money into the US Dollar. But the Federal Reserve may be nearly done with rate hikes. The yield gap is wide. USD/CAD hit a seven-week high of 1.4078 earlier this week, according to Reuters. Markets may not be pricing in enough risk of a Bank of Canada (BoC) hike. Scotiabank puts the odds of a quarter-point BoC hike in October at about 50%. By December, markets have priced in 34 basis points of tightening. The loonie is in a tough spot. Any shift in rate bets could spark a sharp reversal. The BoC has flagged economic uncertainty. Business investment grew 8.8% year-on-year in the second quarter, according to the Bank of Canada.
Technical barriers and currency value
Charts tell their own story. Scotiabank points to the Relative Strength Index (RSI) at 72. That's deep in overbought territory. The bank sees strong resistance for USD/CAD at 1.4200. The pair has struggled to break above the mid-1.41s. If the rally stalls, there's little support before 1.40. Scotiabank's fair value for USD/CAD is 1.4055. That's 85 pips below Friday's close. The loonie is only slightly undervalued at these levels. Market data from Globe and Mail and Investing.com show USD/CAD stuck in the 1.40-1.415 range through mid and late September. The loonie stays weak. No relief yet.
Data and market reaction
Canadian retail sales numbers have not helped. July saw a 0.7% drop. August's advance estimate shows a 1.3% rebound, but that number could change. Markets are not convinced this means stronger demand at home, Reuters reports. Traders are watching interest-rate gaps and technical signals, not short-term data. Bank of Canada Governor Tiff Macklem warned that new US tariffs could slow Canadian growth below 1% in the fourth quarter. He also pointed to inflation risks from higher oil prices, according to Reuters.
USD/CAD's 1.1% weekly gain stands out. Global rate bets are shifting. As reported earlier, even strong Federal Reserve hike bets have not kept the US Dollar strong for long. Markets are weighing the odds of more tightening and possible reversals. Uncertainty is high.
What comes next
Resistance sits at 1.4200. Support is near 1.40. The next move could be sharp. If the BoC surprises with a tougher stance, or if US rate bets fade, the loonie could bounce back. If USD/CAD breaks above resistance, the market may push the pair even higher, despite the risks. Policy moves from the BoC and the Federal Reserve will steer the currency. Investors are watching both closely.
Scotiabank calls the rally "overdone." There's doubt about how long this trend can last. The technical setup and underpriced BoC hike odds mean traders and businesses tied to the loonie need to stay alert. Complacency is risky now.
Major currency pairs like USD/CAD move on interest-rate bets, economic data, and technical signals. The Relative Strength Index (RSI) is a common tool for spotting overbought or oversold moves. When RSI goes above 70, as it has now, it often means the rally is running out of steam. But it's not a guarantee of a reversal. Knowing these drivers is key for anyone managing currency risk or planning cross-border deals.
