The USDCAD pair is currently trading near 1.38300, having declined by about 1% over the past few days following the announcement of a two-week peace agreement in the Middle East. The main catalyst behind this drop was the temporary cooling in demand for the US dollar, which had previously benefited from its safe-haven status during periods of high geopolitical tensions.
Now, let’s turn to other fundamental factors that carry more weight. Spoiler: they all hint at USDCAD’s rally.
1) Negative correlation with oil prices.
Canada remains one of the world's leading crude exporters, and the bulk of its shipments to the United States depend heavily on energy prices. When they rise, the former earns more greenbacks, increasing inflows of foreign currency, strengthening the country’s trade balance, boosting budget revenues, and, as a result, supporting demand for the loonie. Under these circumstances, USDCAD goes down. Conversely, when fuel becomes cheap, the pair tends to climb.
2) Monetary divergence between America and Canada.
The Federal Reserve (Fed) has maintained interest rates at 3.75%, while the Bank of Canada (BoC) has held them at 2.25%. On the one hand, both keep borrowing costs unchanged, but the key difference is that the US regulator adheres to a more hawkish rhetoric, and its counterpart remains more neutral. Consequently, American assets are viewed as more attractive for carry trades.
The ultimate recommendation is to buy USDCAD at the current price, targeting 1.41500 within the next one to two months. To mitigate the risk of adverse market movements, place a Stop Loss order 1% below the entry point.
This content is for informational purposes only and is not intended to be investing advice.
