Insights 
VT 
The Canadian Dollar (CAD) decreased against the US Dollar (USD), nearing six-month lows. This decline is part of a broader trend, with the Loonie weakening against the Greenback for most of the past few months. The Bank of Canada (BoC) reports slightly less dire economic sentiment among Canadian businesses, though recession fears persist.
The USD/CAD exchange rate increased by 0.13% at the week’s start. Over a quarter of Canadian firms foresee a recession in the next year, although this is a slight improvement from prior expectations. The Canadian Consumer Price Index (CPI) data is awaited, but US CPI figures are considered more impactful this week.
Technical Indicators
The CAD’s 50-day EMA has crossed the 200-day EMA, an often bullish indicator. The exchange rate has stabilised above 1.40, continuing September’s upward trend. While nearing overbought RSI levels, the pair holds a positive momentum, with potential to rise further if holding above 1.39.
Key factors for the Canadian Dollar include BoC interest rate policies, Oil prices, economic health, and Trade Balance. Oil price increases can boost the CAD due to its impact on exports. Inflation and strong economic indicators generally support the CAD by attracting investment and impacting interest rates.
Looking back, it’s interesting to see the market grappling with USD/CAD breaking above 1.40, a level we haven’t tested since the first quarter of 2024. Today, the pair is trading closer to 1.3650, as the bullish momentum described in that old analysis has clearly faded. The technical setup has inverted, with the 50-day moving average now threatening to cross back below the 200-day average.
Policy Divergence
The key driver for us now is the growing policy divergence between the Bank of Canada and the U.S. Federal Reserve. We saw Canadian inflation ease to 2.5% last month, reinforcing the BoC’s dovish tilt and fueling speculation of a rate cut in the first quarter of 2026. Meanwhile, U.S. CPI remains stubbornly above 3%, keeping the Fed committed to its “higher for longer” interest rate stance.
This policy gap is weighing heavily on the loonie, a situation made worse by falling energy prices. West Texas Intermediate crude has slipped below $75 a barrel amid renewed concerns about slowing global demand, a stark contrast to the stronger oil market we saw last year. This directly undermines a primary source of strength for the Canadian dollar.
For derivative traders, this environment suggests maintaining a bearish outlook on the CAD against the USD in the coming weeks. We are seeing increased interest in buying USD/CAD call options with strike prices around 1.3750 and 1.3800, positioning for a gradual grind higher. Selling out-of-the-money CAD calls could also be a strategy to collect premium while expressing a view that significant loonie strength is unlikely.
The immediate focus for us will be Canada’s employment report due in early November and the BoC’s next statement. Any further signs of a cooling Canadian economy will likely embolden USD bulls. We should also watch the upcoming U.S. retail sales figures for any surprises that could alter the Fed’s narrative.
