The Canadian Dollar is holding steady with only slight changes, as the market looks for new trade updates. There’s a growing belief that tariff-free trade may not be possible, as the US seems ready to use tariffs to enter Canadian markets. Since April, Canadian short-term rates have risen by 40 basis points, outpacing the increase in US 2-year yields, which might help support the CAD. The upcoming Bank of Canada Q2 Business Outlook Survey could reveal how Canadian businesses are responding to current challenges.

The USD/CAD Position

The USD/CAD has moved above trend resistance since February, yet the CAD remains resilient, finding retracement support at 1.3744. Key resistance is seen around 1.3750/00, with support levels at 1.3700/05 and 1.3650. The information shared includes forward-looking statements and carries risks and uncertainties. We recommend thorough research before making any investment decisions. The views expressed are those of the authors and should not be considered investment advice. Each individual is responsible for any investment losses, and the accuracy of the information presented is not guaranteed. The Canadian dollar faces mixed pressures, creating chances for derivative traders who can navigate uncertainty. The risk of US tariffs clearly affects the value of the currency, prompting the need for strategies that can profit from market volatility, rather than just taking directional bets. The market might be missing the growing differences in policies between central banks. With Canada’s annual inflation dropping to 2.7% in May, the Bank of Canada may have stronger reasons to cut interest rates before the US Federal Reserve does. This fundamental shift could push the USD/CAD pair higher in the medium term.

Business Outlook And Trading Strategy

With the Business Outlook Survey approaching, we suggest that buying options is a wise strategy. A long straddle, which involves purchasing both a call and a put option, can benefit traders from a significant price swing in either direction after the survey is released. This approach effectively anticipates increased market volatility. As the pair tests the important resistance zone near 1.3750, we find value in using options for specific hedging. Traders concerned about a declining Canadian dollar might want to buy USD/CAD call options with strike prices slightly above this level. This strategy provides protection against further declines while limiting maximum risk to the premium paid. This situation recalls the 2017-2018 trade negotiations, where the currency responded sharply to political news, leading to quick and brief price changes. We expect similar behavior now, making it critical to use derivatives to manage risk on any position. Trading on political rumors is likely to result in losses without a clear risk-management plan. The recent rise in Canadian short-term rates, which has bolstered the currency, may not continue. A disappointing business survey could quickly change this trend, causing the rate gap with the US to widen against the loonie. We believe that a drop below the 1.3700 support level would be temporary unless backed by significant economic changes. Create your live VT Markets account and start trading now.

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