USD/CAD has climbed nearly 5% since early May to trade at 1.4240, with the Canadian dollar declining on roughly 80% of trading days. Scotiabank warned the rally has become heavily overbought, with the daily RSI above 88 — its highest in at least two decades. The bank said a correction, when it comes, should be meaningful.
USD/CAD has climbed nearly 5% since early May to trade at 1.4240, with the Canadian dollar declining on roughly 80% of trading days. Scotiabank warned the rally has become heavily overbought, with the daily RSI above 88 — its highest in at least two decades. The bank said a correction, when it comes, should be meaningful.
USD/CAD surged to 1.4240, extending a 5% rally since early May that Scotiabank said has become heavily overbought.
"The correction, when it comes, should be meaningful," Scotiabank said in a note Tuesday, citing extreme technical conditions that historically precede sharp reversals.
The Canadian dollar has lost ground against the greenback on about 80% of trading days since peaking near 1.3550 in early May. The daily relative strength index has risen above 88, the highest reading in at least two decades, according to Scotiabank. Widening US-Canada yield spreads have been the primary driver, with the implied gap approaching 140 basis points in the one- and two-year sectors, though those spreads are now showing signs of stabilizing.
While the bank remains neutral-to-bullish on the pair, it said the risk of a meaningful Canadian dollar recovery is growing as positioning and technical conditions become increasingly stretched. A move above 1.41 opens the door to further gains toward 1.43 and potentially 1.45, Scotiabank said.
The yield differentials that fueled the rally are now showing signs of stabilizing, the bank noted. Scotiabank acknowledged that fighting the prevailing trend carries risk but cautioned that the rally's severity — with the RSI at multi-decade extremes — historically precedes sharp reversals. The Canadian dollar's decline has been near relentless, with the currency losing ground on roughly four out of every five trading sessions since early May, a pace that Scotiabank said is unsustainable.
The warning from Scotiabank adds to growing caution around further USD/CAD upside. A reversal in the pair would provide relief for Canadian importers and could pressure the US dollar broadly, given the greenback's recent strength against most major currencies. Traders will watch for a break below the 1.41 handle as an early signal that the correction has begun, with the next key test coming at the 1.39 support level.
This article is for informational purposes only and does not constitute investment advice.
