Canadian PMI Data Release
The Canadian Dollar is experiencing a modest increase after finding support, following a dip below 1.38. Current movements are narrowing the gap with the estimated fair value of 1.3650, although the currency remains relatively overvalued.
Spot rates are consolidating while the USD has shown a bearish reversal. USD/CAD is currently testing retracement support at 1.3763, which is 38.2% of the late July push higher in the USD.
A push lower could see USD depreciate to the upper 1.36s or low 1.37 range, with resistance at 1.3800/10. Meanwhile, Canada has reiterated its commitment to the USMCA, which keeps a significant portion of exports tariff-free.
Canada is set to release Composite and Services PMI data at 9.30 ET. This economic data may have further implications for the currency’s movement in the near future.
Given the current conditions, we should consider positioning for further Canadian Dollar strength in the coming weeks. Selling USD/CAD call options with strike prices above the 1.3810 resistance level presents a strategy to capitalize on the expected consolidation or downward move. This approach benefits from the view that the pair will likely remain capped in the near term.
The just-released Canadian Services PMI for July came in stronger than anticipated at 52.1, surprising economists who had forecasted a reading closer to 51.5. This data suggests Canada’s economy remains resilient, giving the Bank of Canada more reason to maintain its current policy stance. This positive economic signal reinforces the case for the currency pair to test lower levels.
Comparing Economic Signals
This strength in Canada contrasts with a softer tone from the United States, where last week’s Non-Farm Payrolls report showed a slowdown in job creation. The interest rate futures market is now pricing in a higher probability of a Federal Reserve rate cut before the end of 2025, a sentiment not yet reflected for the Bank of Canada. This growing policy divergence is a primary factor weighing on the USD/CAD exchange rate.
We are also seeing support for the loonie from stable commodity prices, a crucial factor for the Canadian economy. WTI crude oil has held firm above $85 per barrel through early August, providing a solid foundation for the currency. As long as energy markets avoid a sharp downturn, this should limit any significant upside for the USD/CAD pair.
This market environment is reminiscent of the pattern we observed in late 2023, when expectations of a dovish pivot from the Federal Reserve led to broad-based US dollar weakness. During that time, the USD/CAD fell from over 1.38 to below 1.33 in just two months. We could be seeing the beginning of a similar trend as the pair moves towards its estimated fair value in the mid-1.36s.
