The Canadian Dollar (CAD) is holding steady as markets await new U.S. data. The factors affecting the CAD have weakened a bit, with its fair value rising to 1.3685. Even so, the strong U.S. Dollar is preventing the CAD from being severely undervalued. The Bank of Canada’s Q2 survey suggests two rate cuts of 25 basis points each, with an expectation that the CAD will be at 1.35 by the end of the year. However, current market swaps only indicate one rate cut for the remainder of the year. The forecast for USD/CAD by year-end is set at 1.34, with upcoming data including Canada’s Building Permits for June. The USD/CAD rate remains stable but is showing signs of growth in the short term. The U.S. Dollar is facing resistance between 1.3810 and 1.3830, with major resistance potentially in the upper 1.38 range. Support levels are found at 1.3720/30, but the U.S. needs more effort to break through these resistance areas. Currently, the USD/CAD pair is trading close to 1.3750. While our models suggest that CAD is undervalued, the strong U.S. dollar is the key influence for now. This situation is reminiscent of late 2023, when strong U.S. economic performance set the market’s direction. There’s a noticeable gap between what officials say and what the market is pricing in. Canada’s latest July inflation report showed a decrease to 2.8%, along with slow job growth. This strengthens the case for a second Bank of Canada rate cut this year. However, current swaps are only accounting for one cut by October, which might create an opportunity if the central bank shifts to a more dovish stance. Over the next few weeks, we should pay close attention to the technical boundaries, as they outline the current market landscape. The USD is encountering a tough ceiling in the 1.3810 to 1.3830 range, which has held firm several times this summer. This suggests that selling USD strength with call options or using this level as a stop for short CAD positions could be a smart strategy. The key reason for this ceiling is the solid strength of the U.S. dollar, backed by recent data. U.S. inflation for July remained high at 3.3%, which keeps the Federal Reserve cautious and supports the greenback. Therefore, long CAD positions are largely a bet against continued U.S. economic strength. We also need to monitor commodity prices, a usual driver for the loonie. West Texas Intermediate crude oil is stable near $85 a barrel, offering some support for the Canadian currency. This helps counterbalance the interest rate narrative, preventing a significant weakening of the CAD for now.

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