Canadian Dollar Steadies as Oil Recovery and Rate Dynamics Lend Support

Canadian dollar steadies against the U.S. dollar as it continues to trade within a tight consolidation range following its late-December decline. Support from rebounding oil prices and improving interest rate dynamics is helping the loonie hold ground, even as broader FX markets remain cautious. These factors suggest a more balanced near-term outlook for the Canadian currency.

Oil Rebound and Yield Spreads Support the Canadian Dollar

A key reason the Canadian dollar steadies is the recent recovery in crude oil prices. As a major energy exporter, Canada tends to benefit when oil prices rise, as stronger energy revenues support the broader economy and the currency. This rebound has provided the CAD with a clear fundamental tailwind.

In addition, U.S.–Canada interest rate differentials are showing early signs of narrowing after widening in a CAD-negative direction earlier in the month. This shift is important, as yield spreads are a major driver of USD/CAD moves. As spreads stabilize, the Canadian dollar steadies further, reducing upward pressure on the pair.

Scotiabank’s fair value assessment reflects these developments, with USD/CAD fair value currently estimated near 1.3823. Near-term domestic risks appear limited, with upcoming housing and manufacturing data unlikely to significantly alter expectations. With no Bank of Canada speeches scheduled ahead of the January 28 rate decision, policy uncertainty remains relatively low.

Technical Resistance Caps USD/CAD

From a technical standpoint, the USD/CAD rally appears to be losing steam. Price action has stalled below several important resistance levels, including the 50-day moving average near 1.3887, a key Fibonacci retracement, and the psychological 1.39 level. While momentum indicators remain modestly positive, the RSI is easing back toward neutral, suggesting fading bullish pressure.

On the downside, initial support is seen in the mid-1.38 area, followed by the 200-day moving average around 1.3838. A deeper move lower could expose the upper 1.37 region. Overall, analysts expect range-bound trading, with the Canadian dollar steadies narrative supported by a projected near-term range between 1.3820 and 1.3920.

Seasonal trends also tend to favor the Canadian dollar toward the end of January, reinforcing a neutral-to-slightly bullish bias in the weeks ahead.

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