Insights 
VT 
The Canadian Dollar (CAD) maintained its position against the US Dollar (USD), holding gains through the 1.40 mark for the first time in around 10 days. This stability is noted in Scotiabank’s analysis by Shaun Osborne and Eric Theoret.
Government Fiscal Plans
Canada’s Prime Minister Carney addressed the nation to present the government’s fiscal plans with a focus on spending less while investing more. The government aims to attract foreign talent and enhance the resource sector, addressing challenges with the US trading relationship.
Canadian Retail Sales are projected to rise by 1.0% in August, recovering from a 0.8% drop in July. This anticipated rise aligns with preliminary August data, and recent data surprises have been positive. However, predictions from BoC Governor Macklem indicate a potential 1/4-point policy rate cut next week, possibly the last in the cycle based on swaps pricing.
The CAD’s strength is modest, and short-term movement shows minor resistance developing around 1.4005/10. Keeping below the 1.40 area could impact USD support levels near 1.3961, influencing the CAD’s potential short-term rebound.
From our perspective on October 23, 2025, the Canadian dollar is at a pivotal point against the US dollar around the 1.4000 level. Traders should be cautious of a “buy the rumor, sell the fact” reaction to next week’s Bank of Canada meeting. While a rate cut is expected, the market has already priced it in, with overnight index swaps showing a near 90% probability of a 25-basis point cut.
Impact of Political Risks
The key catalyst will not be the cut itself, but the forward guidance from Governor Macklem. Given that recent September inflation data showed the headline CPI cooling to 2.9%, the Bank may signal this is the final cut in its easing cycle. Such a “hawkish cut” could actually strengthen the CAD, catching traders positioned for further weakness off guard.
The government’s fiscal plan and the risk of a non-confidence vote in early November introduce significant political risk. We saw leading up to the 2021 federal election how political uncertainty can increase currency volatility and temporarily weaken the loonie. Therefore, buying options to hedge against a sudden spike in the USD/CAD exchange rate appears to be a prudent strategy.
Technically, the 200-day moving average at 1.3961 is the critical support level to watch. A decisive break below this level, likely driven by a hawkish BoC statement, would open the door for a deeper move towards 1.3800. Failure to break this support, especially if political jitters escalate, could see the pair quickly rebound above 1.40.
Given the conflicting economic and political signals, volatility is likely to increase. Traders could consider strategies like straddles, which profit from a large price move in either direction, centered around the 1.40 strike price. This approach allows one to capitalize on the expected turbulence without betting on a specific outcome from the BoC meeting or the budget vote.
