The Canadian Dollar has been struggling lately, facing a two-day drop against the US Dollar as the US nears a deadline on August 1 for possible tariffs. The Trump administration is having difficulty finalizing trade agreements, with ongoing talks about tariffs with the EU and Canada. In June, US Durable Goods Orders fell less than expected, providing some support for the US Dollar. The USD/CAD pair climbed significantly, surpassing 1.3700 and approaching a technical resistance at 1.3730, even though the terms of trade remained unchanged under the USMCA agreement, a successor to NAFTA.

Factors Influencing The Canadian Dollar

Several factors influence the Canadian Dollar, including the Bank of Canada’s interest rates, oil prices, the health of the economy, inflation, and trade balances. The strength of the Canadian economy and its relationship with the US are also crucial in determining the direction of the currency. The Bank of Canada’s monetary policy plays a huge role in interest rates, which directly affects the Canadian Dollar. Higher rates can attract foreign investment. Oil prices are significant as they directly impact Canada’s exports, with rising prices boosting the CAD’s value. Key economic indicators like GDP and employment data offer insights into how the currency may behave. With the pressure from the administration on trade, traders should brace for increased currency fluctuations. The uncertainty around potential tariffs makes using options to buy volatility a smart strategy, allowing traders to profit from large price movements in USD/CAD, no matter the direction. The fundamental outlook for the Canadian Dollar is weakening due to differences in central bank policies. The Bank of Canada’s recent rate cut to 4.75% in June, with another expected this year, contrasts sharply with the steady stance of the US Federal Reserve. This increasing gap favors the US Dollar.

Market Sentiment And Future Events

Despite this, mixed economic signals suggest caution against making large bets. Canada’s annual inflation rate unexpectedly rose to 2.9% in May, which might lead the central bank to pause rate cuts. Meanwhile, oil prices remain above $80 per barrel, providing a supportive base for the currency tied to commodities. Looking back at the 2018-2019 trade negotiations, we noticed a significant spike in CAD options volatility, and we expect a similar trend now. As the currency pair tests the technical resistance near 1.3730, this level becomes crucial for options traders. A clear break could lead to further gains, while failure might result in a sudden drop. We advise those with long-term ties to the Canadian economy to use derivatives for protection. The formal review of the North American trade agreement set for 2026 presents a major source of uncertainty. Using forward contracts or long-dated options can safeguard against unfavorable currency fluctuations resulting from this event. Create your live VT Markets account and start trading now.

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