USD/CAD moved slightly after recording modest losses in the prior session, trading around 1.4020 during European hours. The daily chart shows a persistent bullish trend with the pair still within its ascending channel.
The 14-day Relative Strength Index held just above 50, indicating a mild bullish bias. Yet, short-term momentum remains weak as the USD/CAD trades just below the nine-day EMA, positioned at 1.4027.
Short Term Momentum Considerations
A breach above this EMA could enhance short-term price momentum, potentially pushing USD/CAD towards the seven-month high of 1.4140. Beyond that, gains might target the ascending channel’s upper boundary at 1.4190.
On the downside, primary support is around the lower boundary of the ascending channel near 1.4000, followed by the 50-day EMA at 1.3965. A drop below these levels could shift momentum to a bearish bias, pressuring the pair towards the three-month low of 1.3721.
The Canadian Dollar showed mixed performance against other currencies today, emerging weakest against the New Zealand Dollar. It displayed slight gains against the US Dollar and was flat against the British Pound, indicating varied market movements among different currency pairs.
We are currently seeing USD/CAD test the 1.4027 level, which is acting as a short-term ceiling. While the pair is still in a broader upward channel, this immediate hesitation suggests that momentum is soft. Derivative traders should note this indecision, as it presents opportunities for strategies that capitalize on either a breakout or a breakdown.
Potential Strategies and Market Outlook
The case for a stronger USD/CAD is supported by recent US inflation data, which last week showed core CPI holding firm at 3.4%, potentially keeping the Federal Reserve on a hawkish path. Traders anticipating a break above 1.4027 could consider buying December call options with a strike price near 1.4050. This positions for a move toward the seven-month high of 1.4140, which we saw earlier this month on November 5th.
On the other hand, weakness in the Canadian economy and falling oil prices create a compelling bearish argument. With WTI crude recently breaking below $70 a barrel and Canadian employment figures from early November showing an unexpected slowdown, the 1.4000 support level looks vulnerable. A break below this psychological mark could be played by purchasing put options with a 1.3950 strike, targeting the 50-day average around 1.3965.
This tension between a robust US economy and a softening Canadian outlook is increasing the potential for a significant price swing. Looking back, we saw a similar divergence between 2014 and 2016, when diverging central bank policies sent the pair sharply higher. Therefore, for those uncertain of direction, volatility-based strategies like buying a straddle could prove effective to capture a large move whether it is up or down.
