USD/CAD experienced a slight movement after showing modest losses in the previous session. It is currently trading around 1.4020 during European trading hours. The daily chart indicates a steady upward trend, as the pair remains within its rising channel. The 14-day Relative Strength Index is just above 50, suggesting a mild bullish sentiment. However, short-term momentum is weak since USD/CAD is trading slightly below the nine-day EMA, which is at 1.4027.

Short Term Momentum Considerations

If USD/CAD breaks above this EMA, it could improve short-term momentum and push the pair towards the seven-month high of 1.4140. Beyond that level, gains may aim for the upper boundary of the ascending channel at 1.4190. On the downside, significant support is at the lower boundary of the ascending channel near 1.4000, followed by the 50-day EMA at 1.3965. A drop below these support levels could shift momentum to the downside, pushing USD/CAD towards the three-month low of 1.3721. Today, the Canadian Dollar showed mixed results against other currencies. It was the weakest compared to the New Zealand Dollar, demonstrated slight gains against the US Dollar, and remained flat against the British Pound, indicating varying market conditions among different currency pairs. Currently, USD/CAD is testing the 1.4027 level, which is acting as a short-term ceiling. Even though the pair is in a broader upward channel, this hesitation suggests weak momentum. Derivative traders should watch this indecision, as it presents opportunities for strategies that could benefit from either a breakout or a breakdown.

Potential Strategies and Market Outlook

The potential for stronger USD/CAD is bolstered by recent US inflation data showing core CPI stable at 3.4%, which may keep the Federal Reserve on a hawkish course. Traders expecting a break above 1.4027 might think about buying December call options with a strike price around 1.4050. This positions them to capitalize on a move towards the seven-month high of 1.4140, previously seen on November 5th. Conversely, weaknesses in the Canadian economy and declining oil prices support a bearish outlook. With WTI crude recently falling below $70 a barrel and Canadian employment data from early November indicating an unexpected slowdown, the 1.4000 support level appears vulnerable. A drop below this psychological level could be addressed by purchasing put options with a strike at 1.3950, aiming for the 50-day average around 1.3965. This tension between a strong US economy and a weakening Canadian outlook raises the likelihood of significant price swings. A similar divergence was observed between 2014 and 2016, when differing central bank policies sharply drove up the pair. Therefore, for those unsure of the direction, volatility-based strategies like buying a straddle may be effective for capturing large moves, whether up or down. Create your live VT Markets account and start trading now.

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