Canadian Dollar Rally Shows Signs of Exhaustion
The Canadian Dollar's recent rally against the US Dollar has raised concerns about its sustainability. According to Scotiabank, the pair is overbought and momentum is stretched, with the Relative Strength Index (RSI) already in overbought territory at 72.
The bank believes that interest-rate expectations are supporting US Dollar demand, with wider US-Canada spreads being a major headwind for the Canadian Dollar. However, Scotiabank also sees the Bank of Canada's potential rate hikes as underpriced, suggesting that the Canadian Dollar is marginally undervalued.
The bank estimates that the probability of an October Bank of Canada quarter-point hike is around 50%, with 34 basis points of cumulative tightening priced by December. Scotiabank also notes that the recent retail sales release had little currency impact, and places USD/CAD fair value at 1.4055.