Insights 
VT 
Prolonged US Government Shutdown Impact
The prolonged US federal government shutdown, now in its fourth week, adds further complexity. A bill failed in the Senate recently, with a 50-43 vote. This situation may bring down the USD if it affects economic performance. Macroeconomic data including GDP and employment figures also play a significant role in determining the CAD’s value. On the other hand, decisions by the Bank of Canada regarding interest rates can impact the currency, with higher rates often supporting the CAD.
With the USD/CAD exchange rate pushing towards 1.4050, we are seeing a critical test for the Canadian dollar. This move is largely fueled by weak oil prices and nervousness ahead of the upcoming Canadian inflation data. Traders should be prepared for significant volatility as the market digests whether Canadian inflation remains sticky, which would influence the Bank of Canada’s (BoC) next move.
The decline in West Texas Intermediate (WTI) crude oil, which recently fell below $75 a barrel for the first time since May 2025, is a major headwind for the loonie. Recent Energy Information Administration (EIA) data showed another build in US crude inventories, confirming fears of a supply glut that is weighing on prices. As Canada is a major oil exporter, this continued price weakness suggests a bearish outlook for the CAD in the near term.
Interest Rate Policy Divergence
A key factor to watch is the growing policy divergence between the Bank of Canada and the US Federal Reserve. While the Fed has signaled it will hold rates steady to combat persistent US inflation, which registered at 3.5% in its last reading, the BoC is facing a weaker economic picture. Any signs of cooling in the Canadian CPI data could reinforce market bets that the BoC will be the first to cut rates in 2026, further strengthening the US dollar by comparison.
In the United States, conflicting signals are creating uncertainty that derivative traders can use. The ongoing government shutdown, which the Congressional Budget Office warned could trim 0.1% from Q4 GDP for every week it continues, is a drag on the US dollar. However, this is being offset by signs of improving trade relations with China, which tends to boost global economic sentiment and benefits the greenback.
Given this mix of high-impact events, using options to manage risk is a prudent strategy. We believe buying USD/CAD call options with a strike price around 1.4100 offers a way to profit from further Canadian dollar weakness while limiting downside risk if the inflation data comes in surprisingly hot. This approach allows traders to position for a potential breakout without being fully exposed to a sharp reversal.
For those with a stronger directional conviction, we see an opportunity in the futures market. If the Canadian CPI data confirms a cooling trend and oil prices fail to rebound, we should consider establishing or adding to long USD/CAD futures positions. The goal would be to ride the momentum caused by the widening interest rate differential between the US and Canada in the coming weeks.
