Insights 
VT 
The USD/CAD pair rose to approximately 1.4060 during Tuesday’s early European session. The Canadian Dollar weakened against the US Dollar, influenced by falling oil prices and anticipation of an interest rate cut from the Bank of Canada, as supported by its Business Outlook Survey.
Canadian businesses reported slightly improved conditions, though hesitant about investments due to US tariffs, with inflation expectations remaining stable. There is a 77% probability of a 25 basis points rate cut in October, according to money markets. The Canadian central bank previously lowered its rate to a three-year low of 2.50%.
Impact Of Crude Oil Prices
Crude oil prices reached a five-month low, affecting the CAD negatively, as Canada is the largest oil exporter to the US. Traders await Canadian CPI inflation data, with expectations of a 2.3% increase in September. A higher-than-expected CPI could benefit the CAD.
The US government shutdown has lasted four weeks, potentially impacting the economy, which could affect the USD. Key factors behind the CAD include Bank of Canada’s interest rates, oil prices, economic health, inflation, and trade balance. Economic indicators, macroeconomic data, and market sentiment also play crucial roles in CAD valuation.
The USD/CAD is firming up around the 1.4060 level as we await today’s pivotal Canadian inflation data. A higher-than-expected CPI reading could give the Loonie a brief lift, but the bigger picture still points to Canadian dollar weakness. The key drivers are the dovish Bank of Canada and falling oil prices.
Canadian Dollar Outing
We see a strong case for a weaker Canadian dollar, with money markets pricing in a 77% probability of another rate cut from the Bank of Canada next week. This follows last month’s cut and is supported by a cautious business outlook survey that highlights the negative impact of US tariffs. The pressure is compounded by WTI crude oil prices, which have fallen below $75 a barrel, down from over $90 this past summer.
In this environment, we should consider positioning for further USD/CAD strength using derivatives. Buying call options with expirations after next week’s BoC meeting could capture a potential move higher if the bank signals more easing. A bull call spread would be a lower-cost alternative to express this view while defining our risk ahead of today’s CPI release.
This situation is reminiscent of what we saw back in 2015, when a similar collapse in oil prices prompted the Bank of Canada to begin an easing cycle. During that period, the USD/CAD exchange rate rallied significantly over several months. This historical precedent suggests the current upward trend could have substantial room to run if these economic conditions persist.
The main risk to this outlook remains the prolonged US government shutdown, which has now entered its fourth week. This funding lapse is starting to weigh on the US dollar as it could negatively impact fourth-quarter GDP growth. The shutdown is also delaying the release of key economic data, creating uncertainty for the Federal Reserve’s own policy path.
