The Canadian Dollar (CAD) is currently weak, but it is doing better than some other G10 currencies. Last week’s strong Canadian employment data didn’t help the CAD much, as it is still feeling pressure from the strong US Dollar (USD). The USD’s strength has been harmful to the CAD. Recent tariffs from the US could add to this negative sentiment. The USD/CAD exchange rate now stands well above what is considered fair, estimated at around 1.3782.

USD Surpasses Expectations

Even though the USD is above this fair value, it is still gaining strength. It has broken through key levels, including the 1.40 area and the 200-day moving average (MA) at 1.3973, which supports further gains for the USD. In the short term, the CAD has little protection against drops. The USD/CAD rate may soon hit resistance levels in the mid to upper 1.41s, especially around 1.4167, a significant retracement mark. However, support for the USD is seen around 1.3980/00. The US dollar is the main driver behind the CAD’s current struggles. Even with Statistics Canada reporting 45,000 new jobs on October 10, 2025, this strength did not counteract the USD’s overall strength. A similar pattern was observed during the US Federal Reserve’s tightening cycle in 2022-2023, when strong local data often couldn’t boost the CAD. Additionally, renewed trade tensions are weighing on sentiment, especially following the US’s announcement of new 10% lumber tariffs. Such trade disputes, which have surfaced frequently over the years, negatively affect Canadian exports and investor confidence. This ongoing issue is clearly a problem for the Canadian dollar.

Concerns About USD/CAD Exchange Rate

We believe the USD/CAD exchange rate is significantly overvalued, trading over two standard deviations higher than what our models consider fair. This excess signals that the current rally may be overstretched. Traders in derivatives should use this overvaluation as a cue to prepare for a possible reversal, perhaps by buying medium-term put options on USD/CAD for a pullback. However, it’s clear from the charts that the USD has strong momentum right now. The breakthrough above the 1.40 level, combined with crossing the 200-day moving average at 1.3973, suggests the potential for further gains soon. There is little resistance ahead, and the 1.4167 area, marking a 50% retracement of its earlier slide, could be tested. In the upcoming weeks, there’s a tension between overstretched fundamentals and strong short-term technical trends. Traders might consider short-dated call options to capitalize on the current upward momentum while keeping an eye out for signs of exhaustion. A crucial support level to watch is the 1.3980/1.4000 zone; if this breaks, it could indicate that the bull run is slowing down. Create your live VT Markets account and start trading now.

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