Insights 
VT 
The USD/CAD pair saw a minor decline during the Asian session on Thursday, slipping below the mid-1.3900s, influenced by a modest weakening of the US Dollar (USD). This movement follows a rebound in the previous session from lows not seen since September 25, staying below the 200-day Simple Moving Average. The Canadian Dollar (CAD) benefited from the Bank of Canada’s recent hawkish outlook. The BoC cut its interest rate but suggested a pause in the monetary easing cycle, providing support for the CAD despite low Crude Oil prices.
Conversely, the USD saw a pullback from a recent two-week high after the Federal Reserve’s hawkish rate cut. The Fed reduced borrowing costs by 25 basis points due to labour market concerns, yet indicated no further cuts were expected soon. Additionally, the Fed plans to halt its balance sheet reduction by December, potentially limiting further USD/CAD losses. Market attention now turns to the awaited meeting between US President Donald Trump and Chinese leader Xi Jinping, anticipated to inject volatility into the market. The meeting holds potential implications for USD movement, impacting the currency pairs discussed.
Trade Agreement Meeting
We see the US Dollar softening following the meeting between Presidents Trump and Xi, which concluded without a new trade agreement. This has pushed USD/CAD below the key 1.3950 level, but we should be cautious about expecting a continued sharp decline. The fundamental picture is now a tug-of-war between central bank policies.
The Bank of Canada’s recent decision to cut its rate to 2.25% while signaling a pause is propping up the Canadian Dollar. With recent Statistics Canada data from earlier this month showing annual inflation holding firm at 2.1%, slightly above target, the BoC has little reason to cut rates further. This provides a strong baseline of support for the loonie.
On the other side, the Federal Reserve also signaled a pause after its own rate cut, which should limit how far the US Dollar can fall. The latest US Non-Farm Payrolls report showed job growth slowing to 145,000, justifying the cut, but with core inflation steady around 2.0%, the Fed is likely to wait and see. This policy divergence between the two central banks appears to be narrowing, which could trap USD/CAD in a range.
Market Volatility and Strategy
This situation reminds us of the volatility seen during the 2018-2019 trade disputes, where market sentiment could shift dramatically on a single headline. The failure to secure a trade deal now revives concerns about global growth, which could eventually weigh on commodity prices like oil and cap the Canadian Dollar’s strength. This creates a conflicting outlook, with policy supporting the CAD but macro risks working against it.
Given these opposing forces, we believe volatility is the most certain outcome for the coming weeks. Implied volatility in CAD options was near multi-month lows before the meeting, but that is set to change. Traders could consider strategies that profit from a significant price swing in either direction, such as buying straddles, rather than taking a simple directional view on the pair.
