The USDCAD exchange rate increased following remarks from President Trump, hinting that some trade deals might involve tariffs instead of negotiations or might be resolved through correspondence. This development caused the Canadian dollar to weaken, pushing the currency pair higher.
The USDCAD had already been trending upwards since reaching a low on Wednesday. In the current trading session, it surpassed the 100-hour moving average at 1.36388 and briefly approached the 200-hour moving average at 1.36801. Initial selling pressure at this level led to a decline back towards the midpoint of July’s trading range at 1.36645.
Midpoint Support and Rally
This midpoint served as a support level, allowing the pair to rebound strongly amid the trade-related news. The rally continued into a resistance zone between 1.3707 and 1.37112, where further selling limited the gains and set a short-term risk boundary.
Subsequently, the pair drifted back towards the 200-hour moving average. The focus now is on whether this level can act as support and reignite the upward momentum observed earlier.
Given the uncertainty introduced by the former president’s comments, we believe traders should position for an increase in volatility. The comments suggest trade policy could become unpredictable, creating sharp price swings rather than a steady trend. This environment makes buying options, which profit from large price movements, more attractive than simply trading futures.
Fundamentally, the case for a higher USDCAD is strengthening, which supports buying call options. Recent data shows Canadian inflation has cooled to 2.7%, giving the Bank of Canada more reason to cut interest rates, while stickier US inflation at 3.4% keeps the Federal Reserve on hold. This divergence in central bank policy historically leads to a stronger US dollar against its Canadian counterpart.
Strategic Trading and Volatility
The technical levels mentioned provide clear points to structure these trades around. We see the 200-hour moving average around 1.3680 as a key pivot for initiating bullish positions. Buying call options with strike prices just above this level, perhaps at 1.3700 or 1.3750, would be a direct way to capitalize on a breakout.
However, since political headlines can cause whipsaws, a strategy that profits from a big move in either direction is also prudent. A long strangle, which involves buying both an out-of-the-money call and put, would be an effective way to trade the expected rise in volatility itself. This is especially relevant considering that over $2.7 billion in goods and services are traded between the two nations daily, making the currency pair highly sensitive to any trade friction.
Historical precedent from the 2018-2019 trade negotiations shows that headline risk often creates sharp, unpredictable spikes in this currency pair. During that period, implied volatility on USDCAD options rose significantly, rewarding traders who were positioned for turbulence rather than a specific direction. We anticipate a similar pattern could unfold in the coming weeks.
Therefore, we are looking at options with expirations in the next 30 to 60 days to capture this potential period of instability. The current price action, consolidating near key moving averages, presents a window to enter these positions. Our primary strategy is to own volatility heading into a period where political rhetoric is likely to intensify.
