Scotiabank strategists Shaun Osborne and Eric Theoret note that the Canadian Dollar (CAD) has held up well through recent Iran-driven volatility, extending its rebound even as the US Dollar (USD) trades mixed. They highlight moderating negative CAD sentiment, cheaper topside USD protection in options, and stress that USD/CAD remains elevated with key resistance at 1.4250/00 and support near 1.4150 and 1.4075/80.

Range resistance caps gains

"The CAD has performed relatively well through the overnight volatility, extending gains that developed over the course of yesterday’s session and ignoring choppy trends in the USD against the core majors. Negative CAD sentiment is moderating but spot remains quite elevated. "

"USD/CAD risk reversals trade at 0.15 vol calls over puts for 3m tenors, half the premium demanded for topside protection two weeks ago and the lowest in close to a month."

"The declining premium for USD calls suggests markets have taken the early July USMCA developments in their stride and might point to some modest upside potential in the CAD."

"We think spreads have to narrow—rather than just stabilize—for the CAD to improve but the shift in risk reversals supports the idea that the CAD slide has been arrested for now."

"Neutral—Despite overnight gains, the technical condition of the CAD is little changed; the recent consolidation continues. The USD remains extremely overbought and we are more confident that the 1.4250/00 range should continue to offer firm resistance to a USD advance. A break under support at 1.4150 would be a bearish signal and prompt spot to test important support at 1.4075/80."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)