USD/CAD was little changed near the top of its year-to-date trading band as the Canadian dollar held close to recent highs. Scotiabank said conditions were leaning towards at least a modest CAD rebound, with the US dollar drifting and risk sentiment positive, but it pointed to the Bank of Canada decision due tomorrow as the main event risk.
The bank estimated spot was sitting around two big figures above fair value, putting that estimate at 1.3758, and said the recent retest of the range highs had not prompted CAD bargain-hunting. It flagged the late March peak at 1.3967 and said firmer evidence of a top or reversal is still needed to reinforce the ceiling in place since the start of the year; meanwhile, it put minor support at 1.3925, with the next level at 1.3870, and described 1.39+ as offering medium-term value for CAD buyers.
Policy Divergence And Market Drivers
We see the Canadian dollar as little changed, hovering near the top of its year-to-date range against the US dollar. Conditions appear favorable for at least a minor rebound, with global risk sentiment leaning positive. The spot price is trading well above our fair value estimate of 1.3758, suggesting the pair is overextended.
The Bank of Canada initiated its easing cycle last week, cutting its policy rate by 25 basis points to 4.75% as inflation has cooled. In contrast, the US Federal Reserve is expected to hold rates steady through the summer, a policy divergence that has fueled the US dollar’s strength. This divergence may now be fully priced into the market, limiting further upside for the pair.
Canada’s latest CPI report for May 2026 showed inflation easing to 2.7%, justifying the Bank of Canada’s move. Meanwhile, the most recent US non-farm payrolls report showed a robust addition of 272,000 jobs, giving the Fed reason to remain patient. This economic split supports the current high exchange rate but also sets the stage for a correction if US data softens.
Trading Strategy And Technical Levels
We continue to think that levels above 1.3900 offer good medium-term value for those looking to buy the Canadian dollar. For derivative traders, this suggests selling out-of-the-money USD/CAD call options with strikes above 1.3975 could be a viable strategy. This approach allows traders to collect premium while capitalizing on the view that the range ceiling will hold in the coming weeks.
A near pinpoint retest of the year’s high around 1.3970 has been met with resistance, and short-term price signals lean modestly bearish for the US dollar. Historically, similar periods of policy divergence in 2017 led to an initial currency overshoot followed by a significant correction. Stronger evidence of a top is needed, but the current setup is beginning to rhyme with past reversals.
Traders should watch for a break below minor support at 1.3925 as an initial signal that the pair is rolling over. A move below this level could open the door for a slide toward the more significant support area of 1.3870. The main risk to this view would be a surprisingly hawkish statement from the Federal Reserve at its next meeting.
