The USD/CAD pair saw a modest decline during the Asian session on Thursday, slipping from its recent multi-month highs around the 1.3860-1.3865 zone. The pair trades near 1.3825, down about 0.10% on the day. The pullback is primarily attributed to a slight downturn in the US dollar, with the US Dollar Index (DXY) easing off its nearly three-month top as traders take profits after a strong rally in recent weeks.

After several weeks of solid gains, the US dollar has seen a slight pullback as investors take profits ahead of critical data and events. While the USD remains underpinned by high US Treasury yields and geopolitical risks, this temporary softness relieves USD/CAD.

The Canadian dollar, being a commodity-linked currency, is gaining some support from the rebound in crude oil prices. Canada is a significant oil exporter, and rising oil prices often boost the Loonie’s value. This is putting some downward pressure on the USD/CAD pair.

Market expectations that the Federal Reserve (Fed) will proceed with modest rate cuts over the next year have elevated US Treasury yields. This has supported the USD in recent weeks despite the current dip. Elevated yields, coupled with US political uncertainty and geopolitical tensions, especially in the Middle East, continue to bolster the USD’s safe-haven appeal.

The BoC’s recent decision to lower its key interest rate by 50 basis points (bps) for the first time since the COVID-19 pandemic, with the potential for further cuts, has limited the Canadian dollar’s upside potential. The prospect of additional BoC rate cuts in response to weaker inflation and economic conditions makes it difficult for the CAD to gain significant strength against the US dollar.

While the USD/CAD pair has edged lower, the fundamental backdrop—strong US Treasury yields, geopolitical tensions, and BoC’s dovish stance—suggests that any meaningful downside for the pair may be limited. Traders will likely wait for more vital follow-through selling before confirming a near-term top for the pair, as the USD remains supported by key macro factors.

Trade Idea:

Consider buying USD/CAD on dips near 1.3800, targeting a return to the 1.3860-1.3870 range, given the buck’s supportive fundamentals. A stop-loss could be placed around 1.3760 in case of a deeper correction driven by oil strength or unexpected loonie resilience.