The Canadian dollar was broadly unchanged in the session despite renewed US–Canada trade friction and targeted import bans. Early gains followed remarks over a “Canada’s (currency) dollar imbalance”, but the move faded as markets assigned limited near-term implications. Later reports of restrictions on some Canadian dairy, alcohol and motorcycle goods also failed to shift the currency, with the measures due to take effect on 29 September.
Scotiabank’s models show improving CAD fundamentals alongside a softer US dollar, and the bank’s fair value estimate for USD/CAD has edged down to 1.3736. Price action has remained range-bound, yet technical signals lean against the greenback: the rebound from the late August low has stalled and reversed, leaving resistance in the low-to-mid 1.39 area. Support is seen at 1.3715/35, with downside risk extending towards 1.3500/50; rallies through the mid-1.38s are expected to attract selling.
Derivative Trading Strategy for USD/CAD
We believe derivative traders should position for a stronger Canadian Dollar (CAD) against the US Dollar (USD) over the next few weeks. Although new US import bans on Canadian goods are set to start on September 29, the CAD has held its ground, and we estimate the fair value for USD/CAD is now down to 1.3736. Traders should look to sell USD/CAD on temporary bounces, targeting a drop toward the 1.3500 to 1.3550 zone.
Economic Rationale and Option Recommendation
Our view is supported by recent economic statistics, with Canada’s GDP growing at an annualized rate of 2.1% in the second quarter, beating expectations and showing economic resilience. Historically, when the Canadian economy outperforms growth expectations while the US Federal Reserve cuts interest rates, the CAD tends to strengthen. With the Fed expected to lower rates further this month, the interest rate gap will likely swing in favor of the Canadian currency.
To capitalize on this trend, we suggest buying out-of-the-money USD/CAD put options with a strike price near 1.3700. Since we see very strong technical resistance in the mid-1.39s, the risk of a major USD rally remains low. This option strategy allows traders to limit their downside risk while positioning for a steady drop in the currency pair.
