Insights 
VT 
The USD/CAD is currently positioned near the upper limit of a days-long range between 1.4000 and 1.4080. Canada’s upcoming September Consumer Price Index (CPI) release is anticipated to show a headline increase to 2.2% year-on-year from August’s 1.9%, while core CPI is expected to remain at 3% year-on-year.
A potential rise in the CPI could prompt expectations for the Bank of Canada (BOC) to consider rate cuts, which may cause USD/CAD rates to increase to 1.4160. Canada’s growth outlook remains weak, leaving the BOC room to lower the policy rate within its estimated neutral range of 2.25% to 3.25%. Current predictions suggest an 80% chance of a rate cut to 2.25% at the October 29 meeting.
Business Outlook Survey
The Bank of Canada’s third-quarter Business Outlook Survey indicates a decline in the future sales growth index to -2, the lowest since the second quarter of 2023. Weak demand is affecting price expectations and margins, impacting the business outlook. Investment intentions are subdued, remaining below long-term averages, with most businesses not planning to hire new staff.
With USD/CAD testing the top of its recent range near 1.4080, we are watching today’s September inflation report closely. The market is already pricing in a high probability of a Bank of Canada rate cut on October 29, with swaps data implying over an 80% chance of a 25 basis point reduction. A softer-than-expected inflation print would likely cement these expectations and push the pair higher.
The outlook for a rate cut is reinforced by deteriorating economic figures beyond just inflation. Statistics Canada’s most recent report showed the economy unexpectedly shed 15,000 jobs in September, pushing the unemployment rate up to 6.4%. This aligns with the Bank of Canada’s own Q3 Business Outlook Survey, which posted its lowest reading for future sales growth since the second quarter of 2023.
Policy Divergence
This weakness in Canada contrasts sharply with the relative stability of the U.S. economy, creating a clear policy divergence. While we anticipate a BOC cut, the CME FedWatch Tool shows futures markets are pricing in virtually no chance of a Federal Reserve rate cut before next year. This growing gap between the two central banks’ expected paths provides a strong fundamental reason for continued USD/CAD strength.
Given this backdrop, we believe positioning for a break above the current 1.4080 resistance is a sound strategy. Traders could consider buying short-dated call options on USD/CAD with a strike price around 1.4100 to capitalize on a potential spike towards the 1.4160 target. This options strategy provides a defined-risk way to capture the upside volatility we expect around today’s data and the upcoming BOC meeting.
Alternatively, a bullish call spread could lower the upfront cost of the trade while still profiting from a move higher. For instance, one might buy a 1.4100 call and simultaneously sell a 1.4200 call expiring in the coming weeks. This situation mirrors the dynamic we observed back in late 2023, when fears of a Canadian recession led to significant CAD underperformance against the dollar.
