Insights 
VT 
The USD/CAD is moving towards the lower end of its range between 1.4000 and 1.4080. Limited easing potential from the Bank of Canada and possible trade and budget developments may strengthen the Canadian Dollar.
Canada’s inflation in September surpassed expectations, with the headline Consumer Price Index (CPI) reaching a seven-month high of 2.4% year-on-year, compared to 1.9% in August. Core CPI also accelerated to a 19-month high of 3.15%, exceeding the consensus prediction of 3.0%.
Inflation And Interest Rates
With underlying inflation risks still present, it seems unlikely the BOC will cut rates below its neutral range of 2.25% to 3.25%. The swaps curve in Canada indicates a 75% likelihood of a 25 basis point reduction to 2.25% at the next meeting in late October, with a minor chance of an additional cut in the first quarter of the next year.
With USD/CAD testing the 1.4000 support level, we see limited reasons for a significant bounce in the near term. The primary driver is Canada’s surprisingly high September inflation report, which complicates the Bank of Canada’s (BOC) ability to cut interest rates aggressively. This suggests that the path of least resistance for the pair is lower in the coming weeks.
The inflation numbers are notable, as the core Consumer Price Index (CPI) hit a 19-month high of 3.15%, reversing the cooling trend we saw over the summer of 2025. This persistent underlying price pressure puts the BOC in a difficult position ahead of its October 29th meeting. While markets still expect a 25-basis-point rate cut, the hot inflation data makes follow-up cuts in early 2026 much less probable.
This dynamic creates a “hawkish cut” scenario, where the BOC may lower rates but signal a prolonged pause, which is ultimately supportive for the Canadian dollar. We saw a similar situation play out in late 2023 when stubborn inflation data forced the central bank to halt its easing considerations, leading to a sharp rally in the CAD. This historical precedent suggests traders should be wary of shorting the Canadian dollar right now.
Looking Ahead To Trade And Budget Developments
Looking ahead, two key events could add further strength to the CAD. Positive whispers surrounding a US-Canada trade agreement expected next week could remove a significant headwind for the Canadian economy. Additionally, the pro-growth federal budget scheduled for November 4 is widely expected to include measures that will support domestic demand.
Given this backdrop, we believe derivative traders should position for either a range-bound or lower USD/CAD. Buying put options with a strike below 1.4000 could be an effective way to play a breakdown of the current range. For those with a more neutral view, selling call spreads above the 1.4080 resistance level offers a strategy to profit if the pair fails to rally significantly from here.
