The Canadian Dollar (CAD) has dipped a bit during quiet trading sessions, mainly due to a stronger US Dollar (USD). According to analysts at Scotiabank, the fair value estimate for CAD has risen slightly to 1.3632.
The CAD’s decline is linked to the overall strength of the USD, even though stronger commodities and a positive risk environment haven’t had much effect. These factors have led to a small increase in the CAD’s fair value, which could boost selling interest for the USD in the upper 1.36s.
US Dollar Momentum
The US dollar is gaining strength, pushing the USD/CAD exchange rate into the upper 1.36s. While market sentiment is positive and commodity prices are rising, the Canadian dollar is struggling to gain support. This suggests that the current upswing is mainly driven by US dollar momentum.
The underlying value of the CAD is improving, with a fair value estimate now at approximately 1.3632. This suggests that the recent rise in the exchange rate might be too high. Last week, the US non-farm payrolls report indicated a slight slowdown in the American labor market, with 160,000 jobs added, which may reduce expectations for aggressive moves from the Federal Reserve through late 2025.
In Canada, January’s inflation data came in slightly higher than expected at 2.9%, which keeps the Bank of Canada on alert. Additionally, WTI crude oil prices are staying well above $82 per barrel, providing a strong support for the loonie. These factors indicate that selling US dollars during rallies against the Canadian dollar is a sensible strategy.
Derivative Trading Strategies
For derivative traders, this setup suggests a range-bound market in the upcoming weeks. The implied volatility for one-month options has dropped below 7%, indicating that the market isn’t expecting a major breakthrough above the 1.3750 resistance level. This environment could make selling options, such as short strangles or call spreads, an appealing choice.
We experienced a similar trend in the second quarter of 2025 when the pair struggled to maintain gains over 1.37 as oil prices strengthened. Therefore, we should see movements toward that level as an opportunity to prepare for a potential pullback to the 1.35s. If the Bank of Canada makes any unexpected hawkish comments in its upcoming statements, it could speed up that move.
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