USDCAD rebound from 1.37 will be short-lived

The USDCAD currency pair at the beginning of the week showed a strong rebound from the level of semi-annual lows. The quotes failed to consolidate under the 1.37 mark from the first attempt, and now we are seeing profit taking on short positions. Nevertheless, selling the US dollar against the Canadian currency can still be a profitable deal. To do so, we need to wait for more interesting price levels, such as in the 1.385-1.39 range. A resumption of the USDCAD decline will be more likely in that area.

According to the analysts of ING and Bank of America, the slight strengthening of the US dollar is based solely on technical factors. From a fundamental perspective, the American currency remains under pressure from Donald Trump's trade policies and the threat of further increases in the national debt. Instead of the US dollar, investors are now preferring to bet on the currencies of Europe, Africa, and the Middle East.

The Canadian dollar may also attract some attention from financial market participants. Investments in this currency will be particularly relevant as the end of the interest rate-cutting cycle approaches. At its upcoming meeting on June 4, the Bank of Canada is expected to keep monetary policy unchanged. This decision is supported by the return of core inflation indicators to growth in April.

Another factor favoring the strengthening of the Canadian dollar is the prospect of a significant increase in government spending and bond issuance. As Reuters experts anticipate, the scale of spending in the current fiscal year will surpass the record set in 2020–2021, when expenditures surged due to the COVID-19 pandemic. The required amount is estimated at 628 billion Canadian dollars ($457 billion). To place such a volume of bonds, Canada will have to offer traders yields exceeding those of other countries' securities.

The current rebound in USDCAD will help pull the Stochastic indicator's lines out of the oversold zone. After that, it will be possible to open short positions again.

Consider the following trading strategy:

Sell USDCAD in the range of 1.385-1.39. Take profit – 1.37. Stop loss – 1.4.