USDCAD Analysis and Projections
USDCAD has reached its highest level in five weeks amid ongoing trade negotiations between the US and Canada. The discussions focus on revising or replacing elements of the USMCA, primarily due to a proposed 35% tariff by the US.
USDCAD has been on the rise for four consecutive days, gaining 200 pips (+1.50%) since bottoming last week. The pair surpassed the early July high and the 50% retracement level, reaching a session high of 1.3780 before settling at 1.3765.
A sustained move above 1.3777 could target the June high of 1.3797, and possibly the psychological level of 1.3800. On the downside, there is support between 1.3749–1.3759 after recently acting as resistance.
Year-to-date, USDCAD is down 4.33%, having trended lower since an initial spike in 2024. The 100-day moving average at 1.3832 remains a resistance level, though recent trading indicates potential consolidation.
Canada ranks third among US import sources, with $437 billion in goods imports in 2024. It follows China at $536 billion and Mexico at $454 billion, accounting for approximately 13.5% of total US goods imports.
Trade Talks Imminence
With the August 1st deadline for US-Canada trade talks just days away, we see a clear risk of further Canadian dollar weakness. The possibility of new tariffs being imposed has already pushed USDCAD to a five-week high. We believe the path of least resistance for the pair is higher in the coming weeks.
This political uncertainty adds to existing economic pressures. Recently released data from Statistics Canada showed the nation’s merchandise trade deficit unexpectedly widened to C$1.9 billion in June. This contrasts with recent U.S. figures, where July’s preliminary manufacturing PMI from S&P Global came in at 52.1, signaling continued expansion.
Given the heightened uncertainty and potential for a sharp move, we feel buying USDCAD call options is a prudent strategy. This approach allows us to capitalize on potential upside if no deal is reached, while limiting our downside risk to the premium paid. Volatility is expected to remain elevated until there is clarity on the trade situation.
We are watching the 1.3800 level closely, as a break above this psychological barrier would signal strong bullish momentum. Our initial target for these option trades would be strikes around the 1.3833 level, which aligns with a key technical resistance point. Historically, trade disputes have caused significant spikes, like the one to nearly 1.4800 in early 2024.
The main risk to this outlook is a surprise last-minute agreement, which would likely cause a sharp reversal in USDCAD. A sustained break back below the 1.3750 area would indicate that the upward momentum is failing. For now, we see the recent break above former resistance as a constructive sign for continued gains.
