The Canadian dollar remained soft but broadly steady, with USD/CAD trading near 1.3850. On Scotiabank’s framework, the currency sits below a fair value estimate of about 1.3690, yet relative-rate dynamics have been less supportive through May. Markets have repriced the Bank of Canada policy outlook and, at the same time, short-term spreads have widened in the US dollar’s favour, helping keep the pair elevated.
Even so, the bank’s base case points to constrained upside for USD/CAD unless a fresh Canada-negative trigger appears, with gains seen as capped around the mid-1.38s. Technical signals were described as bearish, citing a daily key reversal last Thursday and a weekly “shooting star” candle, while price action suggests resistance is already emerging in that mid-1.38 area and there is no clear turn lower yet. The article states it was produced with the assistance of an Artificial Intelligence tool and reviewed by an editor.
Interest Rate Divergence and Economic Headwinds
We are seeing the Canadian dollar struggle, with USD/CAD holding firm near 1.3850. The Bank of Canada’s rate cut to 2.75% yesterday is widening the policy gap with the US Federal Reserve, which is holding its key rate near 4.5%. This growing divergence in interest rates is a fundamental weight on the CAD, favoring the US dollar in the short term.
The soft Canadian jobs report for May, which showed a surprise drop of 10,000 positions, adds to this negative sentiment. In contrast, the US economy remains robust, adding a solid 250,000 jobs in its last report. With WTI crude oil prices softening to around $75 a barrel, a key support for the loonie is also fading.
Options Strategies for a Range-Bound USD/CAD
Given that significant gains for USD/CAD seem capped around the mid-1.38s, we believe selling call options is a prudent strategy for the coming weeks. Consider writing calls with strike prices at 1.3850 or 1.3900 to collect premium from the expected range-bound movement. This approach capitalizes on the view that a major breakout above this resistance level is unlikely without a new catalyst.
At the same time, we must acknowledge the fundamental undervaluation of the CAD and technical signals that suggest a potential reversal. To hedge against a drop toward fair value near 1.3700, traders could use the premium from sold calls to purchase downside protection. Buying puts with a 1.3750 strike, for example, would create a collar strategy that defines a clear trading range.
