The Canadian dollar weakened by 0.1% against the US dollar, pushing USD/CAD to fresh local lows for the CAD at levels last seen in mid-April, as widening US-Canada yield spreads continued to weigh. The move has been closely tied to shifting relative central bank policy expectations: tightening expectations for the Bank of Canada have softened, while the Federal Reserve outlook has moved from rate cuts to hikes. CAD/spread correlations remain elevated, running at 0.89 on a rolling 21-day basis, and the bank characterises the latest leg as somewhat extended, with a risk that Federal Reserve expectations could soften again.
On the charts, USD/CAD has moved above its 200-day moving average at 1.3812, while momentum has strengthened with the RSI rising into the upper 60s and approaching the overbought threshold of 70. Near-term resistance is described as limited ahead of 1.3900, with support seen around the 50-day moving average near 1.3750. The pair is framed as range-bound in the near term, between 1.3780 and 1.3880.
Yield Spreads And Economic Fundamentals
We are seeing the Canadian dollar weaken against the US dollar, extending its slide to levels not seen since mid-April. This is primarily driven by the widening gap between US and Canadian bond yields. The market is pricing in a softer stance from the Bank of Canada while anticipating the US Federal Reserve will remain firm.
This outlook is backed by recent economic data. US inflation for April came in hotter than expected at 3.5%, while the latest jobs report showed robust growth, keeping pressure on the Fed. In contrast, Canada’s inflation has cooled to 2.6% and its unemployment rate recently ticked up to 6.2%, giving the Bank of Canada reason to consider easing policy.
Trading Outlook And Option Strategies
For traders, this suggests a bullish outlook for the USD/CAD pair, with momentum pointing towards the 1.3900 level. We believe buying call options with strike prices near 1.3850 offers a clear way to play this anticipated move. This strategy leverages the upward trend while defining the maximum risk on the trade.
However, we must note that the move is becoming extended, with the Relative Strength Index (RSI) climbing into the upper 60s. Historically, when the RSI on this pair has breached the 70 “overbought” level, it has often led to a brief consolidation or pullback. Therefore, selling out-of-the-money put options could be a way to collect premium while expressing a cautiously bullish view.
Given the clear divergence in central bank policy, we expect increased volatility around their next meetings. Implied volatility in USD/CAD options has already started to rise from its lows. We recommend using the 1.3750 area, which aligns with the 50-day moving average, as a key support level for managing risk on any long positions.
