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The Canadian dollar faced pressure after the announcement that Trump had ended all trade negotiations due to an Ontario-sponsored anti-tariff advertisement. Despite the news, the USD/CAD pair only saw a slight rise of 0.2%, as progress on US-Canada trade discussions had been minimal.
The possibility of a Bank of Canada rate cut has increased, with a 25 basis point reduction likely, aligning with market pricing of 18 basis points. Trade tensions and existing US tariffs are impacting Canadian business investment and hiring, while economic activity and employment concerns might overshadow stronger than expected inflation in September.
Canadian Dollar Outlook
The outlook suggests difficulty for the Bank of Canada to halt easing measures, which may weaken the Canadian dollar across markets. There are chances for USD/CAD to move above 1.410 in the short term. However, by year’s end, a weaker USD could draw the pair closer to 1.38.
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The abrupt end to US-Canada trade talks puts immediate upward pressure on USD/CAD. We saw the pair jump, but the move was muted because there was little optimism for a deal in the first place. The latest Bank of Canada Business Outlook Survey for Q3 2025 already showed a significant drop in investment intentions, confirming that trade uncertainty has been a persistent drag on the economy.
Bank of Canada’s Upcoming Meeting
All eyes are now on the Bank of Canada’s meeting next week, where we believe a rate cut is now more likely than not. Despite the latest CPI report showing inflation still firm at 3.8% for September 2025, the central bank will likely prioritize supporting the economy against these new trade headwinds. This suggests the Bank will keep the door open for further easing into 2026, which should keep the Canadian dollar weak.
Given this, we see near-term opportunities in playing the upside in USD/CAD. Buying call options with strikes around 1.4100 seems like a prudent way to position for a potential spike, especially as implied volatility is likely to rise. This pattern is reminiscent of the uncertainty we saw during the USMCA negotiations back in the 2018-2020 period, which also favored long volatility strategies.
However, this upward move in USD/CAD may be temporary. We are seeing growing market expectations for the US Federal Reserve to begin its own easing cycle in early 2026, which could cap the dollar’s strength. Therefore, any long positions should be managed carefully, as a broader US dollar decline could easily pull the pair back toward the 1.38 level by the end of the year.
