USD/CAD began the week with dip-buying that limited Friday’s retreat from above 1.4000, its highest level since August 7, extending a near two-week rise. The Canadian dollar softened as crude slid to an over one-week low after signs of recovering shipments from Saudi Arabia eased supply concerns. Policy divergence added support for the pair: the Bank of Canada kept its key rate at 2.25% earlier this month, while the Federal Reserve delivered its first increase in more than three years last Wednesday, widening the US–Canada rate gap.
Trade measures also weighed on CAD. The US imposed 50% tariffs on about $20 billion of Canadian goods on August 22, and Canada responded on September 8 with retaliatory duties of 15% to 50% on roughly $20 billion of US goods. The Fed’s dot plot pointed to at least one further hike this year, while Middle East risks persisted after Iran set seven conditions to restart talks with Washington and Iran-backed Houthis in Yemen reported missile and drone attacks on Riyadh. Technically, the pair held above the 100-day EMA at 1.3924 and key Fibonacci levels, with resistance at 1.4052, 1.4137 and 1.4246, and support at 1.3992, 1.3932, 1.3924, 1.3858 and 1.3738.
Technical And Derivative Trading Opportunities
We see a strong opportunity for derivative traders to buy USD/CAD call options or initiate bull call spreads in the coming weeks. The Canadian Dollar is showing clear vulnerability as the pair hovers near the psychological 1.4000 threshold. With the technical bias remaining firmly bullish above the 100-day moving average of 1.3924, targeting the next resistance level at 1.4052 is a high-probability play.
Fundamental Drivers And Geopolitical Risks
Our bullish stance is heavily supported by the widening interest rate gap between the US Federal Reserve and the Bank of Canada. The Fed’s recent rate hike, contrasted with the Bank of Canada keeping its key rate at 2.25%, has pushed the US-Canada 2-year bond yield spread past 110 basis points. This widening yield differential makes holding US Dollar assets far more attractive, providing a strong fundamental tailwind for our long positions.
Further weighing on the Loonie are sliding energy prices and damaging trade retaliations, with WTI crude dropping over 5% this month toward the $68 per barrel mark. On top of cheap oil, the bilateral 50% tariffs on $20 billion worth of goods are already starting to drag on Canada’s export-heavy economy. We expect these combined economic forces to keep pressure on the Canadian Dollar, making protective put options on the CAD a smart hedge.
Geopolitical flares in the Middle East are also keeping global risk premiums high and driving safe-haven flows directly into the greenback. Historically, when geopolitical tensions rise alongside hawkish Fed dot plots, the US Dollar experiences sustained upward momentum. We recommend using any short-term pullbacks toward the 1.3992 support level as buying opportunities to build long exposure.
