The Canadian Dollar (CAD) is slightly losing value as the USD/CAD exchange rate rises above 1.40 in quiet trading conditions. The narrowing swap spreads between the US and Canada are affecting the fair value estimate for USD/CAD, which now stands at 1.3887. Risk appetite is improving, commodities have dropped, and the tighter spreads are helping to limit further CAD losses. The USD has risen a bit from its recent low, but the gains remain modest. Short-term trends hint at possible USD losses, with expected gains likely capped around 1.4035/40.

Threshold Impact on Trading Behaviour

If the USD rises past 1.4050, it could lead to more sustained increases. Support for USD/CAD exists at 1.3980, indicating a key level that could influence trading behavior. The USD/CAD pair is currently stabilizing around the 1.40 mark, suggesting a short pause before a potential decline in the US dollar. Recent price movements are forming what seems to be a bear flag pattern, indicating the continuation of the softer trend seen in late November. This consolidation offers traders a chance to prepare for possible strength in the Canadian dollar. The outlook for a lower USD/CAD is backed by shrinking interest rate differences between the US and Canada. Markets are increasingly expecting a rate cut by the Federal Reserve in early 2026, especially after the November 2025 inflation data showed a surprising cool-down at 2.8%. In contrast, the Bank of Canada is likely to keep its policy rate steady for longer due to ongoing domestic price pressures. The Canadian dollar also gains support from the commodity markets. West Texas Intermediate (WTI) crude oil prices have recently bounced back above $88 per barrel, driven by stable global demand forecasts for the upcoming year. This situation benefits the loonie and reinforces our fair value estimate for USD/CAD, which is closer to the 1.39 level.

Market Strategy for Derivative Traders

For those trading derivatives, this market suggests selling USD/CAD call options or creating bear call spreads in the coming weeks. There is strong resistance near the 40-day moving average at 1.4040, so strikes above this level could be appealing. This strategy allows traders to collect premium while preparing for either a decline or sideways movement in the pair. We witnessed a similar market trend in late 2023 when traders believed the Federal Reserve had concluded its rate hikes, leading to a general decline of the dollar. However, traders should stay disciplined and monitor the 1.4050 level closely. A sustained rise above this level could invalidate the bearish outlook and indicate that the US dollar has gained a firmer position. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now