USD/CAD traded quietly around 1.4175 in European hours on Friday, edging lower as the US Dollar came under pressure and expectations for hawkish Federal Reserve policy eased. The US Dollar Index (DXY) was down 0.14% near 100.70, after June Nonfarm Payrolls showed 57K jobs added versus estimates of 110K. Attention now turns to the US ISM Services PMI for June, due later on Friday.
The Canadian Dollar remained heavy as crude prices slipped back to pre-Middle East war levels, a headwind for Canada as a net oil exporter. Technically, USD/CAD near 1.4179 stayed above the 20-day and 50-day exponential moving averages (EMAs), with the 20-day at 1.4108 and the 50-day at 1.3965, maintaining a bullish bias. The Relative Strength Index (14) sat just below 70, pointing to firm but stretched momentum, while support is seen near the 20-day EMA around 1.4110 and resistance at the 24 June high of 1.4248, ahead of 1.4300.
Fed Outlook and Canadian Dollar Dynamics
The weak US jobs report from yesterday, showing only 57,000 jobs created in June, confirms our view that the Federal Reserve will be less aggressive. This follows last week’s Core PCE inflation data which fell to 2.7%, suggesting price pressures are easing. We see the current US Dollar dip as a short-term reaction rather than a change in the overall trend.
Meanwhile, the Canadian dollar remains weak due to low oil prices, with WTI crude struggling to hold $68 per barrel. This situation is reminiscent of the 2014-2016 period when a collapse in oil prices sent USD/CAD soaring from 1.10 to above 1.45. Given that Canada’s economy is sensitive to commodity prices, we believe the Canadian dollar’s weakness will provide a strong floor for the pair.
Strategy and Key Trading Levels
This presents a clear opportunity for us to position for a resumption of the uptrend in USD/CAD. We are viewing the current dip towards the 1.4110 area as a prime entry point for bullish strategies. Selling out-of-the-money put options with strike prices around 1.4100 or 1.4050 for late July expiration allows us to collect premium while waiting for the uptrend to reassert itself.
The US ISM Services PMI data later today will introduce some volatility, which can be managed effectively with options. A bull call spread, buying a 1.4200 strike call and selling a 1.4300 strike call, offers a defined-risk way to profit from the expected move higher. This strategy capitalizes on the upward momentum while capping potential losses if the market moves unexpectedly.
Our key signal for adding more aggressive long positions will be a decisive break above the June 24 high of 1.4248. If that level is breached, we anticipate a swift move towards 1.4300. At that point, we would look to roll existing long call positions to higher strikes to capture further upside.
