The USDCAD experienced a sharp increase, surpassing the 38.2% retracement of the May decline at 1.37208. It broke through a key swing area between 1.37498 and 1.37590, before nearing the 50% retracement level at 1.3777. The rally lost momentum just short of this target, stalling at 1.3774.
The pair has since moved lower, trading within the 1.37498–1.37590 range, indicating buyer fatigue. A drop below 1.37498 may lead to a retest of the 38.2% retracement at 1.37208, and further to the rising 100-hour moving average near 1.3704. Conversely, rising above 1.37590 would refocus on the 1.3777 target.
Momentum Indicator
With momentum stalled, the swing area now serves as a short-term indicator for determining bullish or bearish control.
We see the stall near the 50% retracement level as a critical moment for derivatives traders. This hesitation is unsurprising given the growing policy divergence between the two relevant central banks. The recent rate cut by Canadian officials to 4.75% contrasts sharply with the hawkish hold from their U.S. counterparts, who now project only one rate cut in 2024.
Should the pair reclaim the level above 1.37590, we would interpret this as the market prioritizing the robust U.S. economy over other factors. With the latest U.S. jobs report adding a much stronger-than-expected 272,000 positions, buying call options or bull call spreads to target higher resistance levels becomes a viable strategy. Historically, periods of strong policy divergence have pushed the pair toward the 1.3900 handle.
Trading Strategies
Conversely, a decisive break below the 1.37498 floor would suggest traders are more concerned about recent softer U.S. inflation data, which came in at 3.3%. This could also be fueled by strength in crude oil, with WTI currently trading above $80 a barrel, which typically supports the Canadian currency. In this scenario, we would consider purchasing put options to capitalize on a move toward the 100-hour moving average.
Given that the pair is coiled within this swing area, we anticipate an increase in short-term volatility. This indecision makes strategies like short straddles or strangles attractive for those expecting a sharp breakout in either direction. For traders with a directional bias, using defined-risk strategies like spreads is prudent until a clearer trend emerges from this pivotal zone.
