Insights 
VT 
The Canadian Dollar has fallen to a six-month low against the US Dollar, with the USD/CAD rising above the 1.4000 threshold. The pair is currently trading around 1.4019, reflecting a 0.45% increase as the Greenback strengthens against other currencies.
The Loonie’s drop follows heightened demand for the US Dollar amid political unrest in France and Japan. Despite the US Dollar’s rise, its broader outlook is not strong due to a continued US government shutdown and expectations of two more Federal Reserve rate cuts this year.
Crude Oil Impact
Crude Oil prices, with West Texas Intermediate near $61.50, have also contributed to the Canadian Dollar’s weakness. As Canada’s leading export, declining oil prices typically decrease demand for the Loonie.
Market expectations suggest the Bank of Canada will cut its policy rate by 25 basis points at its meeting on October 29. The benchmark rate is anticipated to fall to 2.25% by the end of the year as a response to slowing growth and weak labor data.
The upcoming Canadian labor market report could influence short-term market direction, with the Unemployment Rate predicted to increase to 7.2%. A weaker report may reinforce expectations of further easing by the Bank of Canada.
With USD/CAD now firmly above the 1.4000 psychological barrier, the path of least resistance appears higher for the coming weeks. We are seeing derivative markets position for further Canadian dollar weakness, especially with the Bank of Canada expected to cut rates again on October 29. Overnight index swaps are currently pricing in an 85% probability of a 25-basis-point cut, reinforcing this bearish outlook for the loonie.
Canadian Jobs Report
The Canadian jobs report due tomorrow is the next major event, and we should be prepared for a spike in volatility. Following the sharp drop of 65,500 jobs we saw in August, another weak print could accelerate the move towards 1.4100. Traders are using short-dated options, such as weekly straddles, to capitalize on a potentially sharp move in either direction following the data release.
The decline in crude oil, with WTI struggling around $61.50 a barrel, is also weighing heavily on the Canadian dollar. Recent OPEC+ meetings failed to agree on further production cuts, and the latest EIA report showed a surprise build in US inventories of 3.2 million barrels, suggesting oil prices may remain suppressed. This negative correlation means that puts on the Canadian dollar, or calls on USD/CAD, are attractive hedges against further energy market weakness.
However, we must also consider the weakness in the US economy, which could cap this rally in the medium term. The prolonged government shutdown and expectations for more Federal Reserve rate cuts are significant headwinds for the greenback. The last US Non-Farm Payrolls report for September showed a gain of only 95,000 jobs, keeping the pressure on the Fed to act.
This divergence between a dovish BoC and a potentially easing Fed reminds us of the 2015-2016 period, when USD/CAD climbed toward 1.4600. Given the uncertainty, we are seeing increased interest in buying USD/CAD call options with strikes around 1.4150 and 1.4200 expiring after the BoC meeting. Reflecting this tension, one-month implied volatility for the pair has jumped to 9.5%, signaling that the market is bracing for more significant price swings ahead.
