USD/CAD traded near 1.3760 on Friday, supported by inflation worries and rising US Treasury yields after hotter-than-expected US inflation data. Geopolitical uncertainty in the Middle East also supported the US dollar, as talks involving Iran showed little progress and risks around the Strait of Hormuz remained.
US CPI showed headline inflation at 3.8% year on year in April. US PPI rose 1.4% month on month, the strongest monthly increase in four years, adding to expectations that the Federal Reserve may keep rates higher for longer.
Higher oil prices helped limit falls in the Canadian dollar, which often moves with commodities. In Canada, housing-related indicators rose to 279.3K versus 240K expected, while manufacturing data came in at 3% month on month versus 3.5% expected.
On the 4-hour chart, USD/CAD was at 1.3756, above the 20-period SMA at 1.3717 and the 100-period SMA at 1.3659. The RSI was near 78, in overbought territory, with resistance at 1.3767 and support at 1.3751 and 1.3735.
Given the strength in the US dollar, we believe the upward trend in USD/CAD will continue. The Federal Reserve is unlikely to cut rates soon, especially with core CPI inflation holding stubbornly above its 2% target, a situation confirmed by recent data showing it at 3.6%. Derivative traders should therefore favor strategies that profit from the pair moving higher over the next several weeks.
This policy divergence between the Fed and the Bank of Canada is the key driver. While US inflation is proving persistent, recent Canadian figures showed an easing in price pressures, with their annual inflation rate falling to 2.7% in April. This widens the interest rate advantage for the US dollar and puts downward pressure on the loonie.
For those anticipating a continued climb, buying call options with a strike price around 1.3800 for June or July 2026 expiry could be effective. The overbought RSI condition suggests a minor pullback is possible, which would present a better entry point for such positions. This strategy allows us to capitalize on a move higher while defining our maximum risk.
A more conservative approach would be to implement a bull call spread, which would lower the upfront cost of a bullish position. Looking back to late 2025, we saw the USD/CAD pair surge from 1.3600 to over 1.3800 when similar inflation dynamics were at play. Selling out-of-the-money puts with a strike near the 1.3650 support level is another way to collect premium, assuming pullbacks will be shallow.
While oil prices, with WTI crude holding near $84.50 a barrel, are providing a floor for the Canadian dollar, this has not been enough to counter the powerful US dollar trend. Geopolitical tensions in the Middle East are also contributing to safe-haven demand for the greenback. These factors reinforce the view that the path of least resistance for USD/CAD remains upward.
