The Canadian Dollar has dipped slightly in a slow trading session due to unstable oil prices and changing US/Canada spreads. Recent job data did not meet expectations, but strong economic fundamentals and ongoing inflation make it unlikely for the Bank of Canada to lower interest rates. The estimated fair value for USD/CAD has risen slightly to 1.3665, with the spot rate climbing for the third day in a row. A small resistance level at 1.3775 is currently holding back USD gains, but if momentum remains unchanged, it could push up to 1.38.

Potential USD Losses

If the USD falls below the 1.3720/30 range, it could see more losses, aiming for the mid to upper 1.36 area. It’s important for market participants to do thorough research before making any financial decisions due to potential risks. From our viewpoint on August 11, 2025, the weak Canadian employment report for July, which showed a loss of 5,000 jobs compared to the expected gain of 15,000, is putting pressure on the currency. However, with Canada’s latest CPI inflation data for July steady at 3.1%, we think the Bank of Canada will hesitate to lower interest rates. This conflicting information indicates that the Canadian dollar might face challenges in the short term. The fluctuating prices of WTI crude oil, which have struggled to stay above $80 a barrel recently, are also diminishing support for the loonie. Additionally, the spread between US and Canadian 2-year bond yields has widened to 45 basis points in favor of the US dollar. This yield difference contributes to the recent strength of the USD/CAD pair.

Strategies and Market Response

Looking back to late 2024, we saw similar uncertainty around central bank policies leading to choppy, range-bound trading. The key technical levels we see now are important to monitor. Traders should focus on whether these levels hold or break. For those anticipating further USD strength, the resistance level at 1.3775 is crucial. If it breaks and holds above this area, it could lead to higher gains. Strategies such as buying USD/CAD call options to capitalize on a rise toward 1.38 could be appealing. Given the flat momentum, any breakout may be slow, making options with expiries in late September more attractive. Conversely, if the US dollar does not break through the resistance, we could see a decline. A drop below the 1.3720 support level would signal that the Canadian dollar is gaining strength, making bearish strategies, like buying USD/CAD put options, a practical choice to target a move back into the 1.36 range. Considering the mixed signals and unstable conditions, we see value in strategies that can benefit from the pair staying within a defined range. Selling volatility through options, if the risk tolerance allows, could be a good response to the current market situation. This strategy would be effective if the USD/CAD pair continues to fluctuate between its key support and resistance levels until the end of the month. Create your live VT Markets account and start trading now.

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