The Canadian Dollar (CAD) experienced a slowdown in its decline against the US Dollar (USD) on Friday, touching 18-week intraday lows before stabilising. Despite an improvement in Canadian GDP growth in July, the CAD struggled due to minimal shifts in market flows and continued Greenback pressure.
US inflation data met predictions, maintaining market anticipation of another Federal Reserve interest rate cut in October. Despite the weakening USD flows, the CAD found it hard to gain strength. The USD/CAD has been rising since mid-September, with momentum suggesting potential for reaching new psychological resistance levels in the near term.
Key Factors Influencing CAD
Key factors influencing the CAD include the Bank of Canada’s interest rates, oil prices—given petroleum is Canada’s biggest export—the country’s economic health, inflation, and its trade balance. Market sentiment and the US economy, Canada’s largest trading partner, also play roles. Higher oil prices typically boost CAD as it leads to a favourable trade balance.
The Bank of Canada’s interest rate decisions significantly impact the CAD as higher rates generally strengthen the currency. Inflation tends to lead central banks to increase interest rates, drawing global capital and raising CAD demand. Economic data like GDP, PMI, and employment greatly affect CAD value by indicating economic strength or weakness.
We are seeing the US dollar maintain its strength against the Canadian dollar, even with markets fully expecting a Federal Reserve interest rate cut next month. The USD/CAD has pushed decisively above its 200-day moving average, a strong signal that the upward trend has momentum. This suggests traders should favor strategies that benefit from a rising USD/CAD exchange rate.
A key reason for this divergence is the policy outlook between the two central banks. While the Fed is poised to cut, Canada’s inflation remains stubborn, with the August CPI data released last week on September 19, 2025, holding firm at 3.1%. This may force the Bank of Canada to keep interest rates higher for longer, but right now the market is focused on the stronger US dollar trend.
Impact of Oil Prices on CAD
The price of oil, a critical driver for the loonie, is also providing little support. West Texas Intermediate crude has pulled back from its recent highs, now trading around $81.50 per barrel. This softness in a key Canadian export weighs on the currency and adds another reason for the continued grind higher in USD/CAD.
Given the sustained upward momentum, buying call options on USD/CAD seems like a prudent strategy for the coming weeks. This allows us to capture potential gains if the pair breaks through the significant 1.4000 psychological level. Using options instead of trading the underlying pair directly helps to define and limit our maximum risk on the position.
Next week’s US Nonfarm Payrolls report is the main event on the calendar and could introduce significant volatility. The last report for August showed a respectable, but cooling, 175,000 jobs added, keeping the Fed on track for its October cut. A much weaker or stronger number this time could cause a sharp move, making a long straddle a viable play for those who expect a big swing but are unsure of the direction.
Looking at the charts, we haven’t seen a sustained push above the 1.4000 level since the market volatility of late 2022 and early 2023. A clean break above this historical resistance zone could trigger further automated buying and quickly bring the 1.4100 level into focus. For now, the path of least resistance appears to be higher as long as we hold above the 1.3880 support zone.
