USD/CAD continues its decline for the sixth consecutive session, trading near 1.3680 on Monday during Asian trading hours. Technical analysis reveals a downward trend within a recently formed descending channel, indicating a bearish inclination. The 14-day Relative Strength Index is at 32, nearly oversold, which supports a diminishing momentum.
The pair remains below the nine-day and 50-day Exponential Moving Averages, implying continued near-term pressure. Both short-term and longer-term averages slope downward, maintaining a downward tendency. A break below the channel could push the pair to test its six-month low of 1.3642, and potentially 1.3539, the lowest since October 2024.
Primary resistance stands at the nine-day EMA of 1.3787, in line with the upper channel boundary. Surpassing this area might expose the 50-day EMA at 1.3838 and the seven-week high of 1.3928 reached on January 16.
Key Factors for Canadian Dollar Movement
Key factors driving the Canadian Dollar include interest rates set by the Bank of Canada, the price of Oil, and the overall health of the Canadian economy. Other influences are market sentiment and the economic state of the US, Canada’s largest trading partner.
The Bank of Canada’s interest rate decisions significantly impact the Canadian Dollar. Higher interest rates typically benefit the CAD. The price of Oil also affects the CAD, as rising prices often boost the currency due to increased demand.
Inflation data affects CAD value by potentially leading to higher interest rates, attracting more capital inflows. Economic data, including GDP, PMIs, employment statistics, and consumer sentiment, also influences CAD value. A robust economy attracts investment and could lead to higher interest rates, strengthening the CAD. Weaker economic data tends to depreciate the currency.
Given the technical setup, we see the USD/CAD pair trending downwards within a clear channel. The momentum indicators suggest this bearish trend will continue for now, putting pressure on the pair. Derivative traders should view this as a signal to favor strategies that profit from a further decline in the USD/CAD exchange rate.
For the coming weeks, purchasing put options on USD/CAD appears to be a straightforward strategy. Traders could target strike prices near the recent six-month low of 1.3642, or even the October 2025 low of 1.3539, to capitalize on the downward momentum. This approach defines risk to the premium paid for the options while offering significant upside if the bearish trend persists.
Looking Ahead to Interest Rates and Market Sentiments
However, with the Relative Strength Index nearing oversold territory at 32, we must be prepared for a potential short-term bounce. To manage this risk, traders could consider buying call options with a strike price above the 1.3787 resistance level as a hedge. Alternatively, a bear put spread could be used to lower the cost of a purely directional bet and profit from a more gradual decline.
This bearish outlook for the US dollar relative to the Canadian dollar is supported by rising oil prices. We have seen WTI crude prices rally to over $84 per barrel this month, up from the lows in December 2025, driven by tighter supply forecasts from OPEC+. Historically, a sustained oil price above $80 has correlated with strength in the Canadian dollar.
Furthermore, we see a growing divergence in central bank policy expectations. The Bank of Canada is holding a firm line after last week’s Canadian inflation data for December 2025 came in hotter than expected at 2.9%. This contrasts with growing sentiment that the US Federal Reserve may be preparing to signal a rate cut in the second quarter of 2026, weighing on the US dollar.
Recent economic data reinforces this view, as Canada’s labour market showed surprising strength in the last report, adding 55,000 jobs. This solid economic footing gives the Bank of Canada more room to keep interest rates elevated compared to its US counterpart. This fundamental backdrop provides a strong tailwind for the Canadian dollar that aligns with the technical weakness we are observing in the USD/CAD pair.
Looking back at 2025, we saw implied volatility in USD/CAD spike significantly during the third quarter when similar themes of policy divergence were at play. We expect volatility to remain elevated, making options a particularly suitable tool for expressing a view on direction while carefully managing risk. This environment favors those who can structure trades to benefit from both the downward trend and potential short-term price swings.
