USD/CAD rose for a fifth straight session on Tuesday, holding near a two-week high as the US Dollar stayed supported ahead of the Federal Reserve’s policy decision on Wednesday. Oil’s rebound lent some backing to the commodity-linked Canadian Dollar, limiting further gains. The pair was around 1.3913, little changed on the day.
Markets have almost fully priced a Fed rate increase as the Middle East conflict adds an energy shock to the inflation outlook, complicating efforts to return inflation towards the 2% target. Headline CPI was 3.4% year on year in August, while PPI accelerated to 5.4%. The 10-year US Treasury yield moved above 5% and reached its highest level since 2007, with the Dollar further underpinned as DXY traded near 99.60, close to a two-week high. WTI was above $100 a barrel, around levels last seen on 21 May, though CAD support was offset by a firmer US Dollar and the BoC’s steadier stance, leaving the rate gap tilted to the Greenback. Technical levels cited included resistance in the low-to-mid 1.39s and support at 1.3825/30 and 1.3730/60.
Technical And Derivative Trading Strategies
We recommend that derivative traders position for a near-term pullback in the USD/CAD pair as it approaches the critical resistance zone between 1.3913 and 1.3950. Utilizing short-term USD/CAD put options allows us to capitalize on this heavy technical ceiling, which is backed by the 40-day and 100-day moving averages. If the pair fails to break through, we expect a swift retracement toward initial support levels at 1.3825.
Energy Market Impacts And Volatility Trade
To balance this trade, we should look at the energy market where West Texas Intermediate (WTI) crude has surged past $100 a barrel, a level last seen in mid-2024. Because Canada is a major oil exporter, these high prices will eventually provide a strong tailwind for the Canadian Dollar. We can exploit this lag by buying longer-dated CAD call options, anticipating that the commodity strength will eventually overwhelm the current U.S. Dollar dominance.
With the Federal Reserve poised to raise rates due to August’s 3.4% CPI and 5.4% PPI inflation, bond yields have climbed above 5% for the first time since the 2007 financial crisis. However, because implied volatility is highly elevated ahead of the upcoming policy announcement, we suggest selling out-of-the-money USD/CAD strangles. This strategy allows us to collect high premiums while protecting our portfolios against sudden, sharp swings in either direction.
