The Canadian dollar weakened against the US dollar, leaving USD/CAD near fresh local highs as mild risk aversion resurfaced on renewed US–Iran tensions. CAD was down 0.2% versus USD and sat as a mid-performer within the G10. Wider US–Canada yield spreads added pressure, while limited Bank of Canada guidance kept rate expectations constrained in the near term.
Markets were pricing little chance of a hike at the 10 June or 15 July meetings, yet still implied at least one full 25bp BoC increase by October. USD/CAD was trading in the upper 1.38s after clearing local highs, with momentum indicators firming and RSI at 70, the overbought threshold. Technical levels cited were resistance near 1.3900 and support around the 200-day moving average at 1.3812, implying a near-term range of 1.3800 to 1.3900.
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Key Drivers Of USD/CAD Strength
We see the Canadian dollar losing ground to the US dollar as the USD/CAD pair trades near new highs. This weakness is being driven by a cautious market sentiment and fundamental pressures on the loonie. Wider interest rate spreads between the US and Canada are a primary headwind.
The gap in bond yields is a key driver, as the US 2-year Treasury is currently yielding around 4.75% while the equivalent Canadian bond is at 4.20%. This 55-basis-point difference continues to draw capital towards US dollar assets. The recent dip in crude oil prices, with WTI now trading around $78 a barrel, also removes a key pillar of support for the CAD.
The Bank of Canada is offering little guidance, and markets do not expect an interest rate hike until at least October. Canada’s latest inflation report showed CPI easing to 2.6%, giving the central bank plenty of room to remain patient. This contrasts with expectations for US monetary policy, further strengthening the USD.
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Trading Strategy And Technical Outlook
For traders, this suggests the upward trend in USD/CAD has more room to run, but we are mindful that momentum indicators are showing overbought conditions. We see a near-term range between 1.3800 and 1.3900. We believe selling put spreads with strike prices below the 1.3812 support level is an attractive strategy to capitalize on this environment.
This approach allows for profiting from the expected stability or further rise in USD/CAD while defining risk. As long as the pair remains above the key 200-day moving average at 1.3812, this strategy should perform well. The main resistance to watch is the 1.3900 level, which could cap the immediate rally.
