USD/CAD has dropped for six sessions in a row, trading around 1.3680 on Monday during Asian hours. Technical analysis shows a downward trend in a newly formed descending channel, suggesting a bearish outlook. The 14-day Relative Strength Index is at 32, close to oversold levels, indicating weakening momentum. The pair is below the nine-day and 50-day Exponential Moving Averages, signaling ongoing near-term pressure. Both short- and long-term averages are sloping down, maintaining this downward trend. If it breaks below the channel, the pair may test its six-month low of 1.3642 and possibly fall to 1.3539, the lowest level since October 2024. Main resistance is at the nine-day EMA of 1.3787, aligning with the upper channel boundary. If the price exceeds this, it could face resistance at the 50-day EMA of 1.3838 and the seven-week high of 1.3928 reached on January 16.

Key Factors Affecting the Canadian Dollar

The Canadian Dollar is influenced by several factors, including interest rates from the Bank of Canada, oil prices, and the overall Canadian economy. Sentiment in the markets and economic conditions in the US, Canada’s largest trading partner, also play key roles. Decisions on interest rates from the Bank of Canada have a substantial impact on the value of the CAD. Higher rates generally make the CAD stronger. Oil prices are also crucial; when they rise, demand increases, positively affecting the CAD. Inflation data can influence the CAD by leading to higher interest rates, which attract more capital. Economic indicators like GDP, PMIs, employment data, and consumer sentiment also affect CAD strength. A strong economy can lead to more investments and potentially higher interest rates, which boost the CAD. Conversely, weak data can weaken the currency. Currently, USD/CAD is clearly trending down within a defined channel. Momentum indicators suggest this bearish trend is likely to continue, placing ongoing pressure on the pair. Derivative traders might consider this a cue to favor strategies that benefit from further declines in the USD/CAD exchange rate. In the upcoming weeks, buying put options on USD/CAD looks like a solid strategy. Traders might target strike prices around the recent six-month low of 1.3642 or the October 2025 low of 1.3539 to take advantage of the downward trend. This strategy limits risk to the premium paid for the options while offering significant potential rewards if the bearish trend persists.

Future Considerations for Interest Rates and Market Sentiment

Yet, with the Relative Strength Index nearing oversold levels at 32, we should be ready for a possible short-term bounce. Traders could consider buying call options with a strike price above the 1.3787 resistance level as a hedge against this risk. Alternatively, a bear put spread can be employed to reduce the cost of a purely directional bet while profiting from a gradual decline. The bearish outlook for the US dollar versus the Canadian dollar is supported by rising oil prices. This month, WTI crude prices surged to over $84 per barrel, rising from the December 2025 lows, due to tighter supply forecasts from OPEC+. Typically, when oil prices stay above $80, the Canadian dollar tends to strengthen. Additionally, there’s a widening gap in expectations for central bank policies. The Bank of Canada is holding its position firmly after December 2025’s inflation data came in higher than expected at 2.9%. In contrast, there’s increasing sentiment that the US Federal Reserve might hint at a rate cut in the second quarter of 2026, which could weigh on the US dollar. Recent economic data supports this perspective, as Canada’s labor market showed unexpected strength in the last report, adding 55,000 jobs. This solid economic foundation allows the Bank of Canada to maintain elevated interest rates compared to the US. This fundamental backdrop is a strong tailwind for the Canadian dollar, aligning with the technical decline we’re observing in the USD/CAD pair. Reflecting on 2025, we witnessed implied volatility in USD/CAD spiking sharply during the third quarter amid signs of policy divergence. We expect volatility to stay high, making options an effective tool for trading direction while managing risk. This environment favors those who can design trades to capitalize on both the downward trend and potential short-term price swings. Create your live VT Markets account and start trading now.

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