Insights 
VT 
The Bank of Canada conveyed a pessimistic view on the economic outlook due to US trade policy changes. This comes as monetary policy can only ease economic adjustments, with inflation predicted to remain on target.
Following the BoC’s meeting, term yields increased slightly, boosting the CAD, but these gains were reversed in light of actions from the FOMC. With no marked improvement in spreads after both central bank decisions, the CAD might experience further drift.
Currency Movements and Risks
The CAD briefly dipped below 1.39, rebounding to the mid-1.39s, posing a risk of a technical squeeze towards 1.40. A USD advance through the 1.3965 neckline could push it up to 1.4025 by week’s end.
This analysis is compiled by the FXStreet Insights Team, highlighting observations from market experts, alongside internal and external analytics.
The Bank of Canada has signaled it is finished cutting interest rates, deciding that monetary policy has done what it can for now. This decision comes alongside a downbeat view of the economy, which we see reflected in the recent modest 0.8% annualized GDP growth for the third quarter. The core issue is a structural economic shift stemming from ongoing United States trade policies.
Despite the BoC’s pause, any strength in the Canadian dollar was quickly reversed due to caution from the US Federal Reserve. This has prevented the gap in bond yields between our two countries from widening in Canada’s favor. As a result, the USD/CAD exchange rate has drifted back up toward the mid-1.39s.
Inflation and Market Strategies
With Canadian inflation holding steady at 2.1% as of last month, the central bank has little reason to change course unless a significant new development occurs. This leaves the currency exposed to external factors, particularly unresolved USMCA trade disputes that create uncertainty for exporters. We believe this is a primary reason the CAD is struggling to gain ground.
For traders, this points to a risk of a technically driven squeeze back toward the 1.40 area. Buying USD/CAD call options with strikes around 1.40 or just above could be an effective strategy to position for a potential breakout in the coming weeks. One-month implied volatility has already crept up to 7.5%, indicating that the options market is anticipating more currency movement.
Looking back, we saw similar dynamics during the economic uncertainty of early 2020, when USD/CAD pushed well above 1.40. While we are not expecting that level of extreme volatility, it is a reminder that a firm break of the 1.40 level can accelerate quickly. This history suggests that holding bearish positions on the US dollar against the CAD could become increasingly risky if current trends continue.
