Insights 
VT 
The USD/CAD continues to decline as the US Dollar weakens due to lower US Consumer Confidence. Consumer Confidence in the US fell to 94.6 in October from September’s 95.6. The Bank of Canada (BoC) and Federal Reserve (Fed) are set to announce their rate decisions soon, both expected to cut rates by 25 basis points.
The Canadian Dollar strengthens against the US Dollar, with USD/CAD trading around 1.3944, marking a 0.30% drop. The Present Situation Index rose to 129.3, but the Expectations Index decreased to 71.5, staying below the 80-point threshold for nine months. Inflation expectations for the year ahead increased to 5.9%.
The Us Dollar Index Dxy
The US Dollar Index (DXY) dropped to around 98.63. Attention shifts to Wednesday’s rate decisions. The BoC is anticipated to implement a 25 bps rate cut to 2.25%. The decision follows a contraction of 1.6% in Canada’s economy in Q2 and 7.1% unemployment.
The Federal Reserve is expected to announce a 25 bps cut amid weaker inflation data. Traders assign a 96.7% probability to this outcome.
The Canadian Dollar outperformed the British Pound. The currency heat map illustrates percentage changes against major currencies, showing CAD as stronger compared to several others.
The Canadian Dollar is gaining against the US Dollar today, pushing the USD/CAD pair down toward 1.3944. This move is fueled by weak US Consumer Confidence data, which dropped for the second month in a row. Markets are now viewing the US economy with renewed caution ahead of tomorrow’s major central bank decisions.
The Central Bank Decisions
Both the Bank of Canada and the Federal Reserve are expected to cut interest rates by 25 basis points tomorrow. With market pricing from the CME FedWatch Tool showing a 96.7% probability for the Fed’s cut, the event itself is already factored into current prices. Therefore, the immediate market reaction to the cut itself may be limited unless there is a surprise.
For derivative traders, the high certainty around these cuts means implied volatility on very short-term USD/CAD options is likely high. We could consider strategies that profit from a decline in volatility after the announcements are made, such as selling a short-dated straddle. This approach would benefit if the central banks deliver exactly what is expected and the market calms down afterward.
The real focus for the coming weeks will not be the cuts, but the forward guidance from both central banks. We will be listening for any difference in tone between the Fed and the BoC to determine the future path of the currency pair. The central bank that signals a longer or deeper easing cycle will likely see its currency weaken more significantly than the other.
This situation is reminiscent of the coordinated easing we saw during weaker periods in the late 2010s, before the pandemic. Current US jobless claims have also been slowly ticking up, recently hitting a six-month high of 245,000, adding weight to the Fed’s concerns. For Canada, a global slowdown could also put pressure on prices for West Texas Intermediate crude, which have already softened to around $78 a barrel, creating a potential headwind for the loonie despite its current strength.
