USD/CAD gave back earlier gains on Monday as the Canadian Dollar outperformed peers while the US Dollar steadied after mixed US activity readings. The pair was trading near 1.4250, down from an intraday peak of 1.4293, its highest level since April 2025. In the data, the final S&P Global Services PMI for September was revised to 58.8 from 58.7, and the Composite PMI was confirmed at 58.4. By contrast, the ISM Services PMI eased to 54.9 from 55.4, coming in below the 55 forecast.
The US Dollar Index was around 102.20 after earlier touching 102.53, a new year-to-date high, helped by a weaker EUR linked to concerns over France’s public finances and political uncertainty in Spain. US Treasury yields remained elevated, with the 10-year near 5.32% versus last week’s 5.34% high, the strongest level since 2002, while fiscal worries were also cited alongside the policy outlook. In Canada, the 10-year yield was about 3.99%, keeping the yield gap in favour of the US, as markets look to Friday’s September labour force survey: +5.0k jobs after -41.7k in August, unemployment seen at 6.5% (up 0.1ppt) with participation at 65.0%, and Bank of Canada rate-hike pricing quoted at 100bps over 12 months.
Volatility Drivers and Derivative Strategies
We believe derivative traders should prepare for increased volatility in the USD/CAD pair as it hovers around the critical 1.4250 level. Given the massive 1.33% yield gap between US and Canadian 10-year bonds, the bias remains heavily tilted toward a stronger Greenback in the coming weeks. Traders utilizing options or leverage contracts should look to buy USD/CAD on dips, especially if the price stabilizes near the 1.4200 support zone.
This Friday’s upcoming Canadian labor force survey is the most critical near-term catalyst we are watching. With economists forecasting a meager gain of just 5,000 jobs following a loss of 41,700 jobs in August, any further weakness could trigger a sharp sell-off in the Canadian Dollar. We recommend setting up short-CAD positions using derivative strategies to capitalize on a potentially rising unemployment rate, which is projected to tick up to 6.5%.
Yield Spreads, Central Bank Outlooks, and Key Technical Levels
Historically, whenever the US-Canada 10-year bond yield spread widens beyond 1.20%, USD/CAD tends to see sustained upward momentum, as seen during similar divergence periods over the last decade. With current market pricing reflecting an aggressive 100 basis points in rate hikes from the Bank of Canada, we see a high risk of a dovish repricing. Since Canada’s core inflation is already stable near the 2% target, any shift in central bank expectations will likely send the Loonie back toward its recent lows.
Meanwhile, the US Dollar continues to draw strength from high Treasury yields and safe-haven demand stemming from political uncertainty in Europe. Despite mixed business activity data in the US, the persistent 5.32% yield on 10-year Treasuries makes holding USD-denominated assets highly attractive. We advise traders to closely monitor these yields, as any sustained push above 5.34% will likely propel USD/CAD past the 1.4300 resistance level.
