Insights 
VT 
The USD/CAD pair weakens towards 1.4000 in the early European session on Monday. This occurs against a backdrop of stronger-than-expected employment data from Canada, which reduces the likelihood of a Bank of Canada (BoC) interest rate cut this month.
Canadian Employment Data Surprise
Statistics Canada reported that the Canadian Unemployment Rate remained at 7.1% in September, defying estimations of 7.2%. Moreover, Canada’s economy added 60.4K jobs in September, surpassing expectations of 5K and reversing the previous month’s loss of 65.5K jobs.
The BoC had reduced its benchmark rate by 25 basis points last month. However, the probability of a further cut at its next policy decision has now dropped from 72% to 50% post-strong employment figures.
Crude oil price recovery may bolster the Canadian Dollar, given Canada’s status as the largest oil exporter to the US. Concurrently, easing US-China trade tensions, following comments by President Trump, may provide support for the US Dollar.
The Canadian Dollar is influenced by factors such as BoC interest rates, oil prices, economic health, inflation, and trade balance. Relatively higher interest rates and higher oil prices generally positively impact the CAD, while weak economic data adversely affect it.
Implications for the Bank of Canada Meeting
The strong Canadian jobs report has changed the game for the upcoming Bank of Canada meeting on October 29. What we previously saw as a near-certain rate cut is now a coin-flip, introducing significant uncertainty into the USD/CAD pair. This means traders should prepare for a potential spike in volatility rather than committing to a single direction.
We are seeing this uncertainty reflected in the options market, where implied volatility for November USD/CAD contracts has jumped from around 7% to over 9.5% in the last few days. A good strategy would be to consider buying volatility through structures like a straddle around the 1.4000 level, which would profit from a large move in either direction following the BoC’s announcement. This positions for the event itself, not a specific outcome.
Adding to the complexity is the firming price of oil, with WTI crude recently breaking above $88 a barrel for the first time in a month. This trend supports the commodity-linked Loonie and acts as a headwind against any significant USD/CAD upside. However, any continued positive news on the US-China trade front could limit CAD strength, keeping the pair in a choppy range.
The case for the BoC to hold rates steady is also bolstered by recent inflation figures, with Statistics Canada reporting last week that core CPI remained stubbornly high at 2.9%, near the top of the bank’s target range. We saw a similar situation in late 2023 when markets mispriced the timing of central bank pivots, causing sharp repricing events. This historical precedent suggests that positioning for a surprise is more prudent than betting on the consensus.
