The Canadian Dollar is trading lower against the USD, maintaining a familiar range. The Bank of Canada had considered a 25 basis points rate cut at their July meeting but chose to wait for further economic developments.
The Euro-Canadian Dollar pair recently reached its strongest level since 2018 at 1.6134. This is due to a tariff risk premium influencing the CAD, leading to a divergence from the estimated fair value of 1.53.
Current USD/CAD Trading Range
The CAD shows little progress beyond the mid-1.37s, with the USD making minor gains. Resistance for the USD remains at 1.3800/10, while support is at 1.3750.
From our perspective on August 14, 2025, we see the Bank of Canada’s decision to hold rates in July as a pivotal moment. With the latest inflation data for July now released and showing a slight dip to 2.7%, the odds of a rate cut at the next meeting in September are increasing. This policy divergence from the U.S. Federal Reserve, which remains on hold, puts downward pressure on the Canadian dollar.
Given this outlook, we are watching the 1.3800 resistance level for USD/CAD very carefully. A straightforward strategy would be to buy call options with a strike price just above 1.3800, positioning for a breakout in the coming weeks. This approach offers a defined-risk way to capitalize on expected Canadian dollar weakness against the greenback.
Market Impact of Tariff Risks
The situation with the Euro is even more pronounced, as the EUR/CAD cross trades at highs not seen since 2018. The current anxiety stems from uncertainty surrounding the upcoming 2026 review of the USMCA trade agreement, creating a tariff risk premium on the CAD. Historically, we saw a similar spike during the tense NAFTA renegotiations back in 2017-2018, which suggests political risk is the main driver here.
The gap between the current EUR/CAD rate near 1.61 and its estimated fair value around 1.53 suggests the pair is stretched. This points toward using volatility-based strategies, such as buying a strangle, which involves purchasing both an out-of-the-money call and put option. This would allow us to profit from a large price swing, whether tariff fears cause a further spike up or a resolution leads to a sharp drop.
