Scotiabank: Rising energy prices support the Canadian dollar amid the strength of the US dollar

Despite the widespread strengthening of the US dollar, the Canadian dollar (CAD) is showing relative stability, largely due to rising global energy prices. Analysts at Scotiabank note that this factor helps to contain the decline of the Canadian currency and may contribute to its stabilization in the near future.

While the US dollar continues to dominate global currency markets, putting pressure on most currencies, the Canadian dollar finds support in fundamental factors. The key one is Canada's status as a major exporter of energy resources, primarily oil. Rising oil prices directly support the Canadian economy and, as a result, its national currency.

Fair value and current exchange rate

Scotiabank draws attention to the fact that the current USD/CAD exchange rate is trading significantly above its fair value. According to their analytical model, the equilibrium level for the pair is closer to 1.3375. This means that, from a fundamental point of view, the Canadian dollar is undervalued relative to its American counterpart, which creates the potential for its future strengthening or, at least, limits further weakening.

Technical forecast and key levels

In the short term, the bank's analysts identify key technical levels that are monitored by market participants. In their opinion, the 1.37 level, located in the middle of the current trading range, will continue to act as a strong resistance, restraining further growth of the USD/CAD pair.

Nevertheless, Scotiabank does not exclude temporary spikes in volatility. During periods of increased uncertainty in the market, the pair may test higher levels, up to 1.38. However, such movements are likely to be temporary if fundamental factors remain favorable for the Canadian dollar.

Fundamental factors in favor of stabilization

Scotiabank's outlook for the near future remains constructive. A combination of several key factors is expected to help stabilize the Canadian dollar.:

Stable oil prices: Continued high energy prices will continue to support Canada's export earnings.

Yield dynamics: The relatively favorable difference in yields of Canadian and US government bonds can also attract capital and support CAD.

In conclusion, although the strong US dollar remains the dominant theme in the foreign exchange markets, the Canadian dollar has strong arguments in its favor. According to Scotiabank, support from the energy sector and fundamental undervaluation create conditions for the stabilization of the exchange rate and limit the potential for its further significant decline.