The Canadian dollar was little changed against the US dollar, with USD/CAD trading near 1.3800 while Scotiabank’s fair value estimate stands at 1.3672. Price action has been constrained after holiday-related consolidation, and the latest push higher has struggled to extend beyond the 200-day moving average at 1.3812. Trading has settled into a narrow intraday band of roughly 1.3800 to 1.3820.
Momentum gauges have cooled alongside the stalled move, with the RSI easing back towards the lower 60s. If the pair turns lower, the next downside level cited is 1.3750, which aligns closely with the 50-day moving average at 1.3751. On the topside, resistance is seen as limited before 1.3900. The piece also states it was produced with the assistance of an AI tool and reviewed by an editor, within FXStreet’s Insights selection process.
Technical Positioning and Fundamental Fair Value
We are observing the USD/CAD exchange rate holding steady near 1.3800, which is right up against its 200-day moving average. Our fundamental models suggest the pair’s fair value is closer to 1.3672, indicating the Canadian dollar may be undervalued at current levels. The rally in the US dollar appears to be losing steam.
This loss of momentum coincides with recent economic data from the United States. Last week’s US Core PCE Price Index, the Federal Reserve’s preferred inflation gauge, came in at 2.7% year-over-year, just below the 2.8% that was widely expected. This has led markets to price in only a 30% probability of a July rate hike, a significant drop from over 50% earlier this month.
Economic Data, Commodity Prices, and Trading Strategies
In contrast, the Canadian economy is showing resilience, supported by strong commodity prices. WTI crude oil has remained robust, holding above $85 per barrel throughout May and bolstering Canada’s terms of trade. This supports the Bank of Canada’s position to hold interest rates steady, creating a potential policy divergence with a pausing Federal Reserve.
Given the stall at technical resistance and the fundamental backdrop, we are positioning for a potential drop towards the 50-day moving average around 1.3750. We are considering selling call option spreads with a ceiling around the 1.3900 level to capitalize on the limited upside potential. Buying puts with strikes near 1.3750 offers a more direct way to profit from a move lower in the coming weeks.
While a sudden spike in US inflation could reignite the dollar’s rally, the current indicators suggest that risk is skewed to the downside for the pair. This setup is reminiscent of late 2022, when a pause in Fed tightening combined with resilient energy markets led to a multi-week correction in USD/CAD. We view the current levels as an opportunity to implement strategies that benefit from a stronger Canadian dollar.
