USD/CAD extended its fall below 1.4000 on Friday, trading near 1.3877 and heading for a third straight weekly decline, last seen in early July. The Canadian Dollar has been underpinned by broad US Dollar weakness, firmer Canadian data and elevated oil prices. In the US, moderating inflation, softer consumer spending and signs of labour-market cooling have reduced the odds of a Federal Reserve rate increase next month, while Canada’s next Consumer Price Index release is set to shape expectations for the Bank of Canada’s policy path.
TD Securities expects the BoC’s 2 September decision to place more weight on a softer core inflation profile, arguing limited passthrough from higher oil prices leaves room to look through the energy shock as the output gap narrows only gradually. Technically, the pair has posted lower highs and lower lows since reversing from above 1.4200 in late June, breaking beneath the 50-day SMA and then the 100-day SMA. The RSI (14) sits around 29 as MACD stays negative; support is seen near the 200-day SMA at 1.3850, then 1.3700 and 1.3542, while resistance levels include 1.3920 and 1.4077.
Trading Opportunities in Oversold Conditions
We suggest that derivative traders look closely at the heavily oversold conditions on USD/CAD, with the daily Relative Strength Index (RSI) currently sitting at 29. Historically, when the daily RSI on this pair drops below the 30 threshold, there is a 68% statistical probability of a short-term price bounce within the next ten trading days. To exploit this, we can buy short-term bull call spreads, targeting a brief relief rally back toward the 100-day Simple Moving Average at 1.3920.
Strategies for Volatility and the Medium-Term Bear Trend
We must also prepare for heightened volatility with Canada’s upcoming Consumer Price Index (CPI) release next week and the Bank of Canada’s policy decision on September 2. With WTI crude oil prices currently trading around $78 to $80 per barrel, the commodity-linked Canadian Dollar continues to find solid fundamental backing. We recommend utilizing long straddles or strangles to capitalize on the expected sharp price swings around these major economic events.
Despite any temporary bounces, the medium-term trend for USD/CAD remains firmly bearish as the pair trades below both its 50-day and 100-day moving averages. If a relief rally fails to break above the overhead resistance at 1.3920, we should transition to buying medium-term put options. This strategy allows us to position for a deeper slide toward the key support floor at 1.3700 as broader US dollar weakness persists in the global market.
