The Canadian Dollar (CAD) has weakened as the US Dollar (USD) has recovered. The CAD is now in the mid to upper 1.37 range, mostly due to the USD’s rebound, not because of any negative news from Canada. Even with rising stock prices, the CAD remains negatively correlated with risk. Recent data from the International Money Market (IMM) showed an increase in net short positions on the CAD. This is due to poor economic data and speculation about the Bank of Canada’s policies.

Core Inflation And US Tariffs

Core inflation and uncertainty about US tariffs might lead the Bank of Canada to hold its current stance. The CAD’s recovery from the 1.40 level has made it harder for short positions to increase since May. The USD has moved past the 1.3745/50 range, which was previously a support level for the USDCAD pair. Technical indicators show a bearish outlook for the USD over different time frames, with expected resistance around 1.3785/1.3815 and minor support at 1.3740 and 1.3685/90. Recently, the strength of the USD appears to be driving the CAD’s decline rather than weakness in Canada’s economy. The rise in USDCAD to higher 1.37 levels does not indicate a decline in conditions in Canada. In fact, domestic conditions have been relatively stable, but there are challenges. Increased demand for the USD, especially after recent comments from the Federal Open Market Committee (FOMC) and ongoing US economic strength, has pushed this pair up. However, rising short positions on the CAD suggest that traders are becoming more bearish about the loonie, even if they remain uncertain. Futures data indicates that negative positions against the CAD have increased. This growth likely stems from inconsistent economic data and expectations that policymakers in Ottawa will remain cautious. Traders are starting to expect a potential pause in policy actions later this year, especially with ongoing inflation issues and trade tensions creating uncertainty. Officials like Wilkins at the Bank of Canada are not likely to make significant policy changes unless the data necessitates it. Therefore, traders should be careful not to overcommit right now, as the balance between high inflation and supporting economic activity will be challenging.

USDCAD Momentum Shift

The fact that USDCAD has gone above the previous support level near 1.3745 is significant. This level used to act as a barrier, and breaking it may lead to more upward movement in the short term. From a tactical viewpoint, resistance is now seen in the 1.3785 to 1.3815 range. This area previously restricted upward movements and may do so again, especially since broader USD positions are already stretched. On the other hand, support levels just below 1.3740 and around 1.3685/90 might provide opportunities for pauses or reversals, depending on incoming data. While the long-term outlook leans against the dollar, that doesn’t mean prices can’t rise in the short term. The current momentum is unpredictable; short-term trading might remain tight unless macroeconomic data surprises traders. If crucial US inflation data spikes again or trade policies prompt quick reactions, movements in the market could be swifter than anticipated. Although volatility is currently low, it may rise if conditions change. In terms of market positioning, managing bias is crucial rather than making extreme bets. Wait for levels to break before chasing trends. The risks are tangible—tightening interest rate differentials, weaker risk appetite correlations, and technical resistance all suggest that significant movements can occur in both directions. Create your live VT Markets account and start trading now.

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