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\u2019s policy decision on Wednesday. Oil\u2019s rebound lent some backing to the commodity-linked Canadian Dollar, limiting further gains. The pair was around 1.3913, little changed on the day.<\/p>\n\n
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\u2019s 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.<\/p>\n\n
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.<\/p>\n\n
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.<\/p>\n\n
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.<\/p>\n\n\n\n