Insights 
VT 
USD/CAD rose to around 1.4070 during Asian trading on Tuesday. This climb was due to the US Dollar’s strengthening against the Canadian Dollar as traders revised their expectations for further US Federal Reserve rate cuts. The Fed recently lowered its key rate by 25 basis points, now between 3.75% and 4.0%.
Fed Chair Jerome Powell indicated that another rate cut at the December meeting is uncertain. Currently, traders estimate a 70% likelihood of a December rate cut, reduced from 93% previously. Falling crude oil prices also contributed to the Canadian Dollar’s weakness, affecting Canada’s Loonie adversely. Canada is the largest oil exporter to the US, and lower oil prices typically diminish CAD value.
Bank of Canada Interest Rate Trends
The Bank of Canada recently reduced its benchmark rate by 25 basis points to 2.25%, marking a continued trend of cuts. Governor Tiff Macklem emphasized preparedness to respond to major changes in Canada’s economic outlook. Economists predict potential rate cuts next year, despite a current pause.
The Canadian Dollar is driven by factors including BoC interest rates, oil prices, economic health, inflation, and trade balance. Aspects like US economic conditions heavily influence the CAD. BoC actions and oil price shifts have direct impacts on the currency’s strength and balance.
With USD/CAD pushing above 1.4070, we are looking at the highest levels since the market turmoil of early 2020. This move is fueled by a strengthening US Dollar and falling crude oil prices, creating a clear trend. The path of least resistance for the pair appears to be upward in the coming weeks.
The primary driver is the growing gap in central bank policy. The Federal Reserve sounds hesitant to cut rates further, while the Bank of Canada has cut twice in a row and signaled openness to more easing. This has pushed the interest rate differential to over 150 basis points, making it more attractive to hold US dollars.
Pressure on the Canadian Dollar
Pressure on the Canadian dollar is also coming from the energy markets, a critical factor for the nation’s economy. WTI crude oil has recently broken below $65 a barrel for the first time since mid-2023, as recent data from the Energy Information Administration continues to show a build in inventories. This price drop directly weakens the commodity-linked loonie.
Given this backdrop, we see value in strategies that profit from a rising USD/CAD. Buying call options with expirations in late December or January 2026 offers a way to capture potential upside while defining our maximum risk. This allows us to position for a move towards the 1.4200 level, which has not been seen in over five years.
We will be watching for any shift in tone from upcoming Fed speakers and Canadian economic data. This morning’s merchandise trade report already showed a wider-than-expected deficit, confirming the economic drag from US tariffs. Any further signs of Canadian economic weakness would likely add more fuel to the pair’s upward trend.
