Insights 
VT 
The USD/CAD pair steadied near 1.4030 following robust Canadian inflation data, which reduced expectations for a Bank of Canada rate cut. The Canadian Dollar weakened initially but regained ground as the CPI rose 2.4% YoY in September, surpassing the 2.3% forecast.
On a monthly basis, Canada’s CPI increased by 0.1%, reversing a previous decline, driven by lesser declines in gasoline prices and stronger food costs. The core CPI also rose 0.2% MoM and 2.8% YoY. Immediately, swap markets adjusted the likelihood of a 25-bps BoC rate cut to 74%, down from 86%.
Impact Of Falling Oil Prices
Despite the strong data, falling Oil prices continue to affect the Canadian Dollar. WTI Crude Oil has dropped to near five-month lows, trading around $57 per barrel. In the US, reduced trade tensions with China have supported the US Dollar, which is firming against major currencies.
The US Dollar Index is near one-week highs at 98.84, marking its third day of gains. Focus shifts to the US CPI data coming on Friday, which may impact the Federal Reserve’s future policy. The US Dollar remains strongest against the Japanese Yen among major currencies today.
With the Canadian dollar getting a boost from last week’s unexpectedly high inflation figures, we see a familiar pattern emerging. The latest Statistics Canada report showed the Consumer Price Index for September 2025 rose to 3.1% year-over-year, well above the 2.8% that markets were forecasting. This has traders rapidly reassessing the odds of a Bank of Canada (BoC) rate cut before year-end.
Looking back, we saw an almost identical situation years ago when a hot September CPI reading of 2.4% caused rate cut probabilities for the upcoming meeting to fall from 86% to 74% in a single day. This history shows us how sensitive the market is to inflation surprises and how quickly sentiment on the BoC can pivot. We should anticipate similar volatility around central bank communications in the coming weeks.
Strategies For Derivative Traders
For derivative traders, this sudden shift in rate expectations makes options on USD/CAD particularly interesting. With the pair hovering near 1.4050, the increased uncertainty suggests that option premiums, or volatility, will likely rise ahead of the next BoC meeting. A long straddle could be a viable strategy to capitalize on a significant price move in either direction, without betting on which way it will go.
The situation is complicated by strong crude oil prices, a factor that differs from the past. West Texas Intermediate is currently trading near $85 a barrel, a level that would typically provide strong support for the commodity-linked Canadian dollar. However, this support is being muted by the overpowering influence of central bank policy divergence.
On the other side of the pair, the US dollar remains firm, buoyed by the most recent non-farm payrolls report which showed the US economy added a solid 210,000 jobs in September 2025. This strength in the US economy suggests the Federal Reserve will remain on hold, creating a policy tug-of-war against the BoC. This dynamic could keep USD/CAD range-bound but prone to sharp swings on new data releases.
In the weeks leading up to the BoC’s next interest rate decision, traders could use call options to bet on the US dollar’s persistent strength overwhelming any hawkish sentiment from the BoC. Conversely, put options would be a way to position for a surprisingly aggressive tone from the BoC that finally allows high oil prices to propel the Canadian dollar higher. The key will be timing these positions around key data releases and central bank commentary.
