The Canadian Dollar is currently stable and trades within a specific range. It is affected by bond market conditions but is facing limitations due to lower energy prices and stock market fluctuations. The USD/CAD pair is slightly below its fair value, showing resistance near 1.38 and support in the low 1.37s. Positive trends in cash bond and swap spreads provide some support for the CAD. However, the volatility in stock prices and lower energy costs create challenges. The fair value estimate for the CAD has dipped slightly to 1.3805, meaning the USD is priced just below its estimated equilibrium.

CAD Stability and Influences

This stability may further limit the CAD’s movement, keeping it in a range. Recent comments about the USMCA agreement have surfaced, with USTR Greer supporting the U.S. staying in the deal while keeping options flexible. After a decline earlier in the week to the low 1.37s, the CAD has settled into a sideways range. Strong resistance exists around the 1.3790/00 level. If this level is surpassed, the USD could rise to the mid to upper 1.38s. Support remains between 1.3725 and 1.3730. Insights from commercial and external analysts add further perspective on the market situation. The USD/CAD pair is currently stuck in a defined channel, with solid resistance near 1.38 and sturdy support around 1.3725. This sideways movement is influenced by mixed signals: favorable Canadian bond spreads are countered by weaker energy prices and unstable equity markets. The present conditions suggest a lack of a clear direction in the near term. Recent data supports this perspective, as WTI crude oil has dipped to around $78 per barrel, which is a headwind for the loonie. Meanwhile, the gap between Canadian and U.S. 2-year bond yields remains steady at about -45 basis points, preventing a significant drop in the Canadian dollar. The volatility in equity markets, with the VIX index close to 19, is high enough to deter large, risky investments.

Trading Strategies

For options traders, this steady range indicates that selling volatility could be a smart strategy as we approach the new year. Setting up short-term iron condors—selling a call spread above 1.38 and a put spread below 1.37—could take advantage of the anticipated price stability. This method benefits from time passing and the lack of significant price shifts. This situation reminds us of the sideways movements we saw during much of the third quarter of 2024, where trading within the range was quite effective. Futures traders might consider placing limit orders to sell near the 1.3790 resistance and buy near the 1.3730 support. Ongoing political discussions about the USMCA review also add uncertainty to the long-term outlook, making short-term, range-bound strategies more appealing. Create your live VT Markets account and start trading now.

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