USD/CAD Bearish Momentum Intensifies: Scotiabank Targets March Lows Amid Weakening Dollar

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USD/CAD Bearish Momentum Intensifies: Scotiabank Targets March Lows Amid Weakening Dollar

New York, NY – The USD/CAD bearish momentum continues to build, with analysts at Scotiabank now targeting a retest of the March lows. The pair has broken below key support levels, signaling a potential shift in the medium-term trend. Traders are closely watching the Canadian dollar’s resilience against a broadly weaker US dollar.

Scotiabank Analysis Confirms USD/CAD Bearish Momentum

According to Scotiabank’s latest technical note, the USD/CAD bearish momentum is accelerating after the pair failed to hold above the 1.3600 handle. The bank’s strategists point to a series of lower highs and lower lows on the daily chart. This pattern typically confirms a downtrend. They emphasize that the next major target lies near the March low around 1.3400. A break below this level could open the door to further declines.

The analysis highlights the importance of the 50-day moving average, which now acts as resistance. The pair trades well below this average, reinforcing the bearish outlook. Scotiabank uses a combination of moving averages and momentum oscillators to validate this view. The Relative Strength Index (RSI) remains below 50, indicating bearish control.

Key Technical Levels to Watch

• Immediate Resistance: 1.3550 (former support turned resistance)
• Major Resistance: 1.3600 (50-day MA and psychological level)
• Immediate Support: 1.3450 (interim support from March)
• Major Target: 1.3400 (March low and key support zone)

Fundamental Drivers Behind the Bearish Move

Several fundamental factors underpin the USD/CAD bearish momentum. First, the US dollar index (DXY) has weakened broadly. This decline follows softer-than-expected US economic data. Second, oil prices remain elevated, which traditionally supports the Canadian dollar. Canada is a major oil exporter. Third, the Bank of Canada (BoC) has maintained a hawkish stance, contrasting with the Federal Reserve’s recent dovish signals.

The divergence in monetary policy expectations is a key driver. Markets now price in a higher probability of a BoC rate hike than a Fed hike in the coming months. This interest rate differential favors the Canadian dollar. Consequently, the USD/CAD bearish momentum may persist as long as this divergence continues.

Market Sentiment and Positioning

Speculative positioning in the futures market also reflects the bearish sentiment. Data from the Commodity Futures Trading Commission (CFTC) shows that net short positions on the US dollar against the Canadian dollar have increased. This suggests that professional traders are betting on further downside. The combination of technical and fundamental factors creates a powerful bearish cocktail.

Historical Context: March Lows as a Key Pivot

The March low near 1.3400 holds significant historical importance. It represents the lowest level for the pair in over six months. A break below this level would confirm a new downtrend. It would also invalidate the consolidation range that has held since February. Scotiabank’s analysis treats this level as a critical pivot point. If the USD/CAD bearish momentum continues, a break below 1.3400 could accelerate selling pressure.

Conversely, a bounce from this level could signal a temporary pause. However, the bank’s base case favors a break lower. They cite the lack of bullish catalysts for the US dollar. The US economic calendar remains light this week, offering little support for the greenback.

Impact on Canadian Importers and Exporters

A weaker USD/CAD exchange rate has mixed implications for Canadian businesses. Exporters benefit from a weaker Canadian dollar, as their goods become cheaper for foreign buyers. However, importers face higher costs for raw materials and finished goods. The recent USD/CAD bearish momentum favors Canadian exporters, particularly in the energy and manufacturing sectors. Companies like Enbridge and Shopify may see a tailwind from the currency move.

For US-based investors with Canadian exposure, the currency move reduces the value of their holdings when converted back to USD. This is an important consideration for portfolio managers.

Technical Indicators Reinforce Bearish View

Beyond Scotiabank’s analysis, other technical indicators align with the USD/CAD bearish momentum. The MACD (Moving Average Convergence Divergence) has crossed below its signal line. This is a classic bearish signal. The Bollinger Bands are widening, indicating increased volatility. The price is hugging the lower band, suggesting strong selling pressure.

The Ichimoku Cloud also shows a bearish setup. The price is below the cloud, and the conversion line is below the baseline. These configurations all point to a continuation of the downtrend. Traders should watch for any signs of reversal, such as a bullish divergence on the RSI or a strong bounce from support.

Weekly Chart Analysis

On the weekly timeframe, the USD/CAD bearish momentum is even more pronounced. The pair has posted three consecutive bearish weekly candles. This is the longest losing streak since November of last year. The weekly RSI is approaching oversold territory, which could lead to a short-term bounce. However, the overall trend remains firmly bearish. Scotiabank’s target of the March lows aligns with the weekly support zone.

Potential Catalysts for a Reversal

While the USD/CAD bearish momentum is strong, several catalysts could trigger a reversal. A surprise hawkish shift from the Federal Reserve would boost the US dollar. Strong US employment or inflation data could also support the greenback. Additionally, a sharp decline in oil prices would hurt the Canadian dollar. Any escalation in geopolitical tensions that favors safe-haven demand for the USD could also reverse the trend.

However, Scotiabank views these scenarios as less likely in the near term. The bank’s strategists recommend staying short USD/CAD with a stop above 1.3650. They see the risk-reward ratio as favorable for bearish positions.

Key Economic Data to Watch

Traders should monitor the following data releases for further direction:

• Canadian GDP (monthly) – due next week
• US ISM Manufacturing PMI – due this week
• Bank of Canada interest rate decision – next month
• US Non-Farm Payrolls – due in two weeks

Conclusion

The USD/CAD bearish momentum remains intact, with Scotiabank’s technical analysis pointing to a retest of the March lows near 1.3400. A combination of fundamental divergences, technical breakdowns, and bearish sentiment supports this outlook. Traders should watch the 1.3400 level closely, as a break below it could accelerate the decline. Conversely, a bounce from this level may offer a short-term trading opportunity. The key takeaway is that the path of least resistance for USD/CAD remains lower, barring a major shift in the macroeconomic landscape.

FAQs

Q1: What does Scotiabank’s analysis say about USD/CAD?
Scotiabank confirms that USD/CAD bearish momentum is targeting the March lows near 1.3400, based on technical breakdowns and fundamental factors.

Q2: Why is the Canadian dollar strengthening against the US dollar?
The Canadian dollar is strengthening due to elevated oil prices, a hawkish Bank of Canada, and broad US dollar weakness from softer economic data.

Q3: What is the key support level for USD/CAD?
The key support level is the March low around 1.3400. A break below this level could trigger further downside toward 1.3300.

Q4: How can traders trade the USD/CAD bearish momentum?
Traders can consider short positions with a stop above 1.3650, targeting 1.3400. Monitoring technical indicators like RSI and MACD can help time entries.

Q5: What could reverse the bearish trend in USD/CAD?
A hawkish Federal Reserve, strong US economic data, a sharp drop in oil prices, or geopolitical tensions favoring the US dollar could reverse the trend.

Q6: How does the USD/CAD move affect Canadian businesses?
A weaker USD/CAD benefits Canadian exporters by making goods cheaper abroad, but it increases costs for importers and reduces the value of US-dollar holdings for Canadian investors.

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