The Canadian Dollar (CAD) dropped by 0.3% against the US Dollar (USD), continuing its losses from Thursday. The CAD struggles due to wider interest rate gaps between the US and Canada, even as the overall situation remains stable. The fair value for USD/CAD is around 1.3553.

Bank of Canada Rate Decision

No important domestic data will be released until the Bank of Canada’s rate decision next Wednesday. Rates are expected to stay at 2.75%. Recent comments from officials suggests a neutral stance that leans slightly dovish. Markets believe there could be a reduction of 11 basis points by the end of the year, which might help the CAD if this neutral tone continues. The downward trend in the medium-term has steadied, with recent prices showing lows just under the 1.36 level and resistance around the mid-1.37s. The RSI has moved closer to neutral, going from below 30 in June to nearly 50. This suggests that prices may be range-bound between 1.3600 and 1.3720 in the short term. This information includes risks and uncertainties and is not an investment recommendation. It’s important to conduct thorough research, as investing in open markets can lead to losses. You alone are responsible for any risks, losses, and costs involved, and neither the author nor the platform can guarantee error-free information. We see the recent weakness in the CAD is mainly due to the significant difference in interest rates between the US and Canada. The Federal Reserve’s rate is close to 5.50%, while the Bank of Canada is at 4.50%. This yield advantage attracts capital to the US Dollar, helping to explain why the exchange rate is above what is considered fair value.

Central Bank Rate Decision

All attention is now on the central bank’s rate decision next week, with the swap markets indicating a greater than 60% chance of a rate cut. Recent inflation rates have slowed to 2.7%, supporting the case for easing. However, a surprisingly strong jobs report in April, showing 90,000 new jobs, adds complexity to the situation. This uncertainty ahead of the announcement suggests that implied volatility may be lower than expected. From a technical perspective, we expect a period of consolidation, with the Relative Strength Index hovering around 50. We find strategies that benefit from stable price movements, like selling an iron condor with strikes outside of 1.3600 and 1.3720, to be appealing as we approach the announcement. This strategy allows us to take advantage of the market’s current stability while managing our risk. If the rate decision indicates a dovish path, we may adjust our strategies to prepare for a possible breakout above the mid-1.37s resistance. Historically, periods when central bank policies diverge, such as from 2017 to 2018, have led to significant movements in currency pairs. Therefore, buying call options that expire in the coming weeks could be a wise way to benefit from potential gains if the central bank hints at more easing. Create your live VT Markets account and start trading now.

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