The Canadian Dollar is slowly rising after bouncing back from below 1.38. It’s closing in on the fair value estimate of 1.3650, though it is still seen as somewhat overvalued. Spot rates are stabilizing, while the USD is experiencing a bearish reversal. Currently, USD/CAD is testing support at 1.3763, which represents 38.2% of the recent USD increase from late July. If USD continues to drop, it may fall into the upper 1.36s or the low 1.37s, with resistance at 1.3800/10. Canada has reaffirmed its commitment to the USMCA, which allows many exports to remain tariff-free. Later today, Canada will release Composite and Services PMI data at 9:30 ET. This information could further influence currency movements soon. Given the current situation, we might want to prepare for stronger Canadian Dollar performance in the upcoming weeks. One strategy is to sell USD/CAD call options with strike prices above the 1.3810 resistance. This approach allows us to take advantage of the expected range or possible downward movement, as we believe the pair will likely stay within this limit for now. The newly released Canadian Services PMI for July was unexpectedly strong at 52.1, beating the anticipated 51.5. This indicates that Canada’s economy is holding up well, giving the Bank of Canada more reason to keep its current policies. This positive signal supports the idea that the currency pair may test lower levels. Canada’s strength contrasts with softer trends in the United States. Last week’s Non-Farm Payrolls report showed a slowdown in job creation. The interest rate futures market is now betting on a higher chance of a Federal Reserve rate cut before the end of 2025, a sentiment not yet seen with the Bank of Canada. This growing difference in policies is a key factor affecting the USD/CAD exchange rate. The loonie is also getting support from stable commodity prices, which are vital for the Canadian economy. WTI crude oil has remained strong above $85 per barrel through early August, giving the currency a solid base. As long as energy prices don’t experience a sharp decline, this should prevent any significant rise in the USD/CAD pair. The current market environment is similar to what we saw in late 2023. Back then, expectations of a dovish shift from the Federal Reserve led to widespread weakness of the US dollar. At that time, USD/CAD dropped from over 1.38 to below 1.33 in just two months. We might be witnessing the start of a similar trend as the pair approaches its estimated fair value in the mid-1.36s.

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