National Bank of Canada expects USD/CAD to stay broadly range-bound in the coming months as shifting expectations for Federal Reserve and Bank of Canada policy offset each other. Softer US data and a more cautious Fed stance could cap further US Dollar strength, while Canadian fundamentals and oil prices are seen as factors that could limit sustained Canadian Dollar weakness.
The bank’s base case is for USD/CAD to oscillate within its recent trading band, with upside risks if US economic resilience leads markets to scale back Fed easing expectations further. Downside risks would arise if global risk sentiment improves and oil prices remain supported. A break below the lower bound would be needed to indicate a more durable Canadian Dollar appreciation cycle, which would likely require stronger domestic data alongside a clearer shift in global risk appetite.
Fundamentals and Recent Data Keep USD/CAD Range-Bound
We continue to see the USD/CAD currency pair trading within a familiar range, lacking a strong reason to break out in either direction. The market seems balanced between a more cautious U.S. Federal Reserve and steady Canadian economic fundamentals. This suggests that betting on a big, sustained move right now is likely the wrong play.
This view is supported by recent data showing a slight cooling in the American economy. For instance, the latest U.S. jobs report from May showed payrolls increasing by 170,000, just missing the 185,000 forecast, which keeps the Fed from becoming more aggressive. Historically, periods where central bank policies are closely aligned, as they are now, often lead to less currency volatility.
On the other side, the Canadian dollar is finding a floor, preventing a significant slide. Canadian inflation is holding around 2.6%, giving the Bank of Canada little reason to cut interest rates faster than the Fed. Furthermore, with WTI crude oil prices holding steady above $80 per barrel, Canada’s key export is providing stable support for the loonie.
Strategies and Risks in a Low-Volatility Environment
For the coming weeks, we believe the best approach is to sell volatility rather than bet on direction. This can be done through options strategies like an iron condor, which profits if USD/CAD stays within a defined channel. This strategy allows us to collect premium from the lack of movement.
We are defining the likely trading range between 1.3500 and 1.3850. Therefore, our strategy involves selling call options with strike prices above 1.3850 and selling put options with strikes below 1.3500. As long as the pair remains between these levels, these positions should be profitable as time passes.
The main risk is a sudden breakout caused by an unexpected economic report, such as a surprisingly high U.S. inflation number. For example, back in late 2024, a similar range-bound market was broken by an unforeseen jump in U.S. wage growth, so we will monitor incoming data closely. We would be reluctant to chase any rallies toward the top of this range, seeing them as opportunities to reinforce our volatility-selling positions.
