The Canadian Dollar (CAD) decreased by 0.3% against the US Dollar (USD), continuing Thursday’s losses. The CAD faces challenges from wider US-Canada yield spreads, though broader fundamentals stay steady, with USD/CAD fair value around 1.3553.
Bank Of Canada Rate Decision
No domestic data releases are scheduled until the Bank of Canada’s rate decision next Wednesday, where rates are expected to hold at 2.75%. Recent communications suggest a neutral tone with a slight dovish bias, and markets predict 11 basis points of easing by year-end, potentially supporting the CAD if a neutral stance is maintained.
The medium-term bear trend has stabilised, with recent prices showing lows just below the 1.36 level and resistance in the mid-1.37s. The RSI indicates a move towards neutral, shifting from sub-30 oversold levels in mid-June to nearer 50, suggesting a near-term range bound between 1.3600 and 1.3720.
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We observe the pair’s recent weakness is driven by the significant gap between US and Canadian interest rates. The Federal Reserve’s rate sits near 5.50% while the Bank of Canada is at 4.50%, creating a yield advantage that naturally pulls capital towards the greenback. This fundamental pressure helps explain why the exchange rate remains above its perceived fair value.
Central Bank Rate Decision
All eyes are now on the central bank’s rate decision next week, with swaps markets pricing in a greater than 60% chance of a rate cut. While recent inflation data slowing to 2.7% supports easing, a surprisingly strong jobs report showing 90,000 new positions in April complicates the picture. This uncertainty ahead of the announcement suggests implied volatility may be underpriced.
The technical picture supports a period of consolidation, with the Relative Strength Index moving to a neutral reading near 50. We believe this makes strategies that benefit from range-bound price action and time decay, like selling an iron condor with strikes outside the 1.3600 and 1.3720 levels, attractive in the days leading up to the announcement. This approach capitalizes on the market’s current stability while defining risk.
Should the rate decision confirm a dovish path, we will look to adjust our positioning for a potential breakout above the mid-1.37s resistance. Historically, periods of diverging central bank policy, such as in 2017-2018, have fueled sustained moves in the currency pair. Therefore, purchasing call options with expirations in the coming weeks could be a prudent way to capture potential upside if the central bank signals further easing.
