Insights 
VT 
USD/CAD fell to 1.4040 as the US Dollar experiences pressure amidst ongoing US government shutdown and trade tensions with China. Lower Oil prices add to the constraints on the Canadian Dollar’s strength, helping limit significant depreciation of the USD/CAD pair.
On Thursday, the US Senate failed for the tenth time to progress on the Republican funding bill, risking the furlough of at least 10,000 federal employees as per the White House. Meanwhile, several Federal Reserve members support further interest rate cuts, with markets anticipating a 25-basis-point reduction in October.
Trade Tensions and Economic Uncertainties
Trade relations continue to deteriorate, as US President claims engagement in a trade war with China, and US Treasury Secretary escalates tensions further. Such developments contribute to heightened risk aversion, affecting the US Dollar negatively.
Crude Oil price drops could potentially curb the downside for USD/CAD given Canada’s status as a major Oil exporter to the US. Recent Canadian employment figures showed unexpected growth in September, possibly influencing the Bank of Canada’s rate decisions.
A heat map displays percentage changes of major currencies, showing the Canadian Dollar’s performance against others. Markets move quickly, and insights are rapidly distributed through updates for traders and financial enthusiasts.
Given the sideways consolidation of USD/CAD around 1.4040, we are seeing a tug-of-war between major economic forces. The US Dollar is being weighed down by domestic political chaos and the near-certainty of a Fed rate cut. This creates a challenging environment where clear directional bets are risky in the immediate term.
The ongoing US government shutdown is a significant source of this uncertainty, and we should not underestimate its potential length. We saw back in the 2018-2019 shutdown that it lasted for 35 days, costing the economy an estimated $11 billion according to the Congressional Budget Office. This historical precedent suggests the current deadlock could persist, further dampening sentiment for the US Dollar as we head towards the end of the month.
Oil Prices and Canadian Dollar Dynamics
On the other hand, the drop in WTI Crude oil prices to below $70 a barrel for the first time since May is a major headwind for the Canadian dollar. Weakening global manufacturing data, especially recent PMI figures from China dipping below 50, signals contracting demand that could keep oil prices suppressed. This acts as a strong support for the USD/CAD pair, preventing it from falling further despite the weak US Dollar.
With these opposing factors, we believe strategies that profit from low volatility could be effective in the next one to two weeks. Selling volatility through options, such as setting up an iron condor with strikes well outside the recent 1.4000-1.4100 range, could allow traders to collect premium as the pair remains range-bound. This strategy benefits from the time decay that will occur while Washington and oil markets find their footing.
However, we must also prepare for an eventual breakout, as this consolidation will not last forever. A resolution in Washington or a sharp reversal in oil prices could trigger a significant move. Therefore, placing orders for a long straddle, buying both a call and a put option, could be a prudent way to capture a large price swing in either direction once the current stalemate breaks.
