Insights 
VT 
USD/CAD rose near the 1.3960 mark during European trading on Tuesday as traders closely watch upcoming US-Canada trade discussions. The US Dollar’s appeal as a safe-haven currency increases amid political unrest in France, despite the ongoing US government shutdown and strong market expectations for a dovish Federal Reserve stance weighing on its potential gains.
The US Dollar Index, which tracks the Greenback against six major currencies, rose by 0.4% to approximately 98.50. On the domestic front, Canada expects to have added 7.5K jobs in September, following a loss of 65.5K positions in August.
US Senate Dynamics
Democratic support was absent for a short-term funding bill in the US Senate on Monday, with Republicans maintaining healthcare benefit cuts made earlier this year. There is an 80% chance that the Federal Reserve will cut interest rates by 25 basis points at each of its remaining two meetings this year.
Prime Minister Mark Carney and President Donald Trump are set to meet in Washington to discuss trade. With the Canadian labour report due on Friday, the employment numbers will be scrutinised for any economic impact.
The Federal Reserve shapes the US Dollar’s value through monetary policy, with their primary tools being interest rate adjustments and, in extreme conditions, quantitative easing. Quantitative easing and tightening significantly influence the strength of the US Dollar.
With USD/CAD pushing towards 1.3960, we see a market pulled in two directions. The US Dollar is catching a safe-haven bid due to political instability in France, but this strength is being questioned by domestic issues. A looming government shutdown and strong expectations for Federal Reserve rate cuts are creating significant headwinds for the dollar.
Canadian Dollar Outlook
The weakness in the Canadian dollar seems more immediate, making it the primary driver for the pair’s upward move. The forecast for Canada to add only 7,500 jobs this Friday is extremely weak, especially after losing over 65,000 positions last month. For perspective, throughout much of 2024, Statistics Canada often reported monthly job gains exceeding 40,000, highlighting how poor the current expectation is.
Traders should be cautious about chasing this US dollar strength too far, as it may not last. We remember the US government shutdown in late 2018, which lasted 35 days and ultimately contributed to a dip in the US Dollar Index as economic uncertainty took its toll. The current political gridlock over funding bills presents a similar risk that could quickly erode the dollar’s safe-haven appeal.
The Federal Reserve’s dovish stance is the most significant factor for the medium term. The market is pricing in an 80% chance of two more rate cuts this year, a powerful signal that weighs on the dollar. Looking back at the Fed’s easing cycle in 2019, the dollar eventually weakened as lower interest rates made the currency less attractive to hold.
Given the upcoming Canadian jobs report and the US-Canada trade talks, implied volatility in USD/CAD options will likely be high. Buying short-dated call options could be a way to trade a potential break above the key 1.4000 psychological level, which we saw act as strong resistance back in 2022 and 2023. This strategy defines risk if the news turns out positive for the Canadian dollar.
For those looking beyond this week, the expectation of Fed cuts presents a different opportunity. Buying USD/CAD put options with expirations later in the year could be an effective hedge or position for a reversal. This allows us to bet that the Fed’s monetary policy will eventually overwhelm the current short-term Canadian economic weakness.
