USD/CAD edged higher on Friday, trading around 1.4000 and up 0.10%, as the US dollar stayed supported by expectations of further Federal Reserve tightening alongside a rebound in US Treasury yields. The Fed lifted its benchmark rate by 25 bps on Wednesday to 3.75%-4%, described as its first hike since 2023, while projections showed 16 of 18 officials anticipating at least one more increase this year. Markets are pricing a roughly 55% chance of another 25 bps move at the October meeting via CME FedWatch, and the 10-year yield rose to about 4.98% after Tuesday’s 5.04% high, the highest since 2007. The US Dollar Index (DXY) held above 100.50, near a seven-week peak.
Oil’s rebound helped underpin the Canadian dollar, tempering USD/CAD gains, with WTI recovering to around $97.30 after an intraday low of $94.63 as Middle East supply concerns persisted around the Strait of Hormuz. Scotiabank cited wider US–Canada front-end spreads as a drag and placed fair value at 1.3910, while attention turns to BoC Governor Macklem speaking on Monday. In technical terms, USD/CAD traded at 1.4007, holding above the 100-period SMA near 1.3951 and the 200-period SMA around 1.3886; resistance sits at 1.4015 then 1.4030, while support is seen at 1.3974, 1.3945 and 1.3886, with RSI (14) near 63.
Trading Strategy Around USD/CAD and Federal Reserve Policy
We see the USD/CAD pair trading near the key 1.4000 level, pushed upward by the Federal Reserve’s recent rate hike to 3.75%-4.00%. With US 10-year Treasury yields rebounding to 4.98%, the US Dollar Index is holding strong above 100.50. We advise derivative traders to position for short-term swings as the market prices in a 55% chance of another US rate hike in October.
Given that the pair is trading above its 100-period simple moving average of 1.3951, we recommend buying short-term call options targeting the 1.4030 resistance. However, because Bank of Canada Governor Macklem speaks on Monday, we should consider a long straddle strategy to profit from sharp moves in either direction. Historically, major central bank speeches can push weekly implied volatility for the Canadian Dollar up by 1% to 2%.
Oil Price Dynamics and Risk Management Approaches
We also need to watch oil prices closely, as West Texas Intermediate has climbed back to $97.30 amid Middle East tensions. If oil prices surge further, the Canadian Dollar could strengthen, pulling the pair down toward its estimated fair value of 1.3910. To hedge against this potential drop, we suggest using bear put spreads, which offer a cost-effective way to protect long USD positions.
Currently, the widening bond yield spread between the US and Canada continues to drag the Canadian Dollar down. Since 16 out of 18 Fed officials expect borrowing costs to stay high, the overall trend favors the US dollar. We believe traders should focus on short-dated contracts to stay flexible as these central bank policies unfold.
