Insights 
VT 
The USD/CAD pair moved downwards below 1.3950 due to recent indications of a softer stance from Federal Reserve policymakers, who are considering rate cuts within the year. Additionally, the US government’s shutdown has persisted into its ninth day without any progress, as legislative proposals to resolve the issue continue to be rejected.
President Trump promised fair treatment for Canada in discussions over US tariffs, though there was uncertainty about broader trade negotiations involving Mexico. This coincided with the Bank of Canada reducing its overnight policy rate by 25 basis points to 2.50% in response to a slowing economy and easing inflation, marking its first rate cut after a six-month pause.
The Impact Of Canadian Dollar
The Canadian Dollar’s value is primarily impacted by the Bank of Canada’s interest rates, oil prices, and the overall health of its economy. Economic data such as GDP and employment reports further influence its strength. The role of Canada’s trade balance, juxtaposed against fluctuating oil prices, considerably affects its currency. Higher oil prices often boost the Canadian Dollar by improving trade balances, while lower prices generally exert a negative impact.
The Federal Reserve’s dovish stance is the main story, suggesting more rate cuts before the year is out. This is weighing on the US Dollar, especially with the ongoing government shutdown creating political uncertainty. We see this putting continued downward pressure on the USD/CAD pair in the near term.
However, we must remember the Bank of Canada is also in an easing cycle, having cut rates to 2.50% last month due to a weakening economy. This sets up a dynamic where both central banks are looking to cut, limiting how far the pair might fall. The key question is which central bank will be more aggressive in its dovish policy.
Recent data supports this dovish outlook from both sides, making the situation complex. The latest US Consumer Price Index for September 2025 cooled to 2.8%, justifying the Fed’s position, while last week’s Canadian Labour Force Survey showed a surprise loss of 15,000 jobs.
Potential Opportunity With Options
Given this environment, buying USD/CAD put options seems like a prudent strategy for the coming weeks. This allows us to profit from a potential downward move toward the 1.3850 level while capping our risk. We are looking at options with a mid-November 2025 expiry to capture volatility from the Bank of Canada’s next meeting on October 29.
We are also watching oil prices, a key driver for the Canadian Dollar. WTI crude has slipped from over $85 to around $81.50 a barrel recently, which could act as a headwind for the loonie. This softness in oil could slow the descent of USD/CAD, making option strategies more attractive than outright short positions.
This situation feels similar to the environment we saw back in 2019 when the Fed began an easing cycle, leading to months of US Dollar weakness. We will be monitoring comments from policymakers on both sides of the border for any change in tone. Any sign that the US government shutdown is nearing a resolution could cause a sharp, albeit temporary, reversal.
