Scotiabank: CAD Stretched, USD/CAD Set for Sideways Grind

The transmission from valuation to price action works through the incentive to fade overbought levels. When a currency is rich, carry-trade flows and exporter hedging tend to lean against it. In the case of USD/CAD, stretched CAD valuation acts as a headwind to further loonie strength. The pair has been confined to a narrow band as markets weigh diverging central bank paths.

The Bank of Canada has kept its policy rate on hold since July, while the Federal Reserve has signaled a cautious pause. That narrowing rate gap has removed a key driver of CAD strength, leaving the currency to trade on commodity flows and global risk sentiment. Oil prices, typically a tailwind for the loonie, have not been enough to break the sideways grind, underscoring the weight of the valuation anchor.

The Next Catalyst: Central Bank Divergence

The next concrete marker for the pair will be the Bank of Canada’s upcoming policy announcement. Any shift in tone–either a more hawkish stance or a dovish tilt–could break the sideways pattern. Traders will also watch Canadian inflation data and U.S. payrolls for clues on the rate trajectory. A hawkish BoC surprise would challenge the stretched valuation call, while a dovish lean would reinforce it and potentially send USD/CAD higher.

Until a clear catalyst arrives, USD/CAD is likely to remain in a holding pattern. A break above recent resistance or below support would confirm whether the stretched valuation call translates into a directional move. For now, the loonie’s rich valuation keeps the pair locked in a waiting game.