The Canadian Dollar has experienced a slight dip in a quiet trading session, linked to choppy oil prices and fluctuating US/Canada spreads. Recent employment data fell short of expectations, but ongoing economic resilience and persistent inflation suggest further policy easing is unlikely.
The USD/CAD estimated fair value increased slightly to 1.3665, with the spot rate rising for a third consecutive day. A minor resistance level at 1.3775 is currently capping USD gains, with potential overshoots to 1.38 if the trend momentum remains flat.
Potential USD Losses
A break below the 1.3720/30 range could lead to more USD losses, targeting the mid to upper 1.36 area. It’s advised that market participants conduct comprehensive research before making financial decisions due to associated risks.
From our perspective on August 11, 2025, the weak Canadian employment report for July, which showed a loss of 5,000 jobs against expectations of a 15,000 gain, is weighing on the currency. However, with Canada’s latest CPI inflation data for July holding firm at 3.1%, we believe the Bank of Canada will be hesitant to consider cutting interest rates. This conflicting data suggests a continued tug-of-war for the Canadian dollar in the near term.
The choppy price action in WTI crude oil, which has struggled to maintain levels above $80 a barrel over the past month, is removing a key pillar of support for the loonie. We are also seeing the spread between US and Canadian 2-year bond yields widen to 45 basis points in favour of the US dollar. This yield advantage helps explain the recent strength in the USD/CAD pair.
Strategies and Market Response
Looking back, we saw a similar situation in late 2024 where uncertainty around central bank policy led to choppy, range-bound trading for weeks. The key technical levels identified now are therefore critical signposts for us. A trader’s response should be guided by whether these levels hold or break.
For those of us leaning towards further USD strength, the 1.3775 resistance level is the one to watch. A break and hold above this area could trigger further gains, making strategies that profit from a rise towards 1.38, such as buying USD/CAD call options, seem attractive. The flat momentum suggests any breakout might be slow, favouring options with expiry dates in late September.
On the other hand, if the US dollar fails to break that resistance, we could see a retreat. A move below the 1.3720 support level would signal that the Canadian dollar is regaining its footing. This could make bearish strategies, like buying USD/CAD put options, a viable way to target a move back into the 1.36s.
Given the mixed signals and choppy conditions, we see merit in strategies that can profit from the pair remaining within a defined range. Selling volatility through options, if risk tolerance allows, could be a response to the current market environment. This approach would be effective if the USD/CAD pair continues to pivot between its key support and resistance levels through the end of the month.
