Insights 
VT 
Fed Policy and Market Reactions
Concerns arise from the prolonged US government shutdown, now in its sixth week, complicating the resolution due to Congressional deadlock. Factors affecting CAD include Canada’s interest rates, Oil prices, economic health, inflation, and trade balance, with the US’s economic health also influencing CAD.
The BoC sets interest rates influencing CAD, seeking to maintain 1-3% inflation. Oil as Canada’s major export heavily impacts CAD value, with higher prices boosting CAD. Economic indicators like GDP and employment can sway CAD, with strong data supporting a robust CAD.
We are seeing USD/CAD stuck in a narrow range around the 1.4010 mark. This is a classic tug-of-war, with higher oil prices supporting the Canadian dollar while a cautious US Federal Reserve outlook props up the US dollar. Derivative traders should view this as a period of consolidation before a potentially sharp move.
Impact of Oil Prices
The strength in the Canadian dollar is directly tied to the recent rebound in oil. OPEC+ signaling a pause in production increases for early 2026 has helped hold West Texas Intermediate crude near $61 a barrel, a welcome relief after prices trended down from the $80-$90 range we saw through much of 2023 and 2024. As long as oil holds these levels, it will be difficult for USD/CAD to break significantly higher.
On the other side, the US dollar is finding a solid floor. After the Fed cut rates twice this year to the current 3.75%-4.0% range, Chairman Powell’s recent comments have dampened hopes for another cut in December. The market has repriced accordingly, with CME FedWatch Tool probabilities for a December cut falling from 93% to 69% in just one week.
A significant risk creating uncertainty for the US dollar is the prolonged government shutdown, now in its sixth week. We have to consider the economic drag this creates, similar to how the 35-day shutdown in 2018-2019 was estimated by the Congressional Budget Office to have cost the US economy around $11 billion. This ongoing impasse could unexpectedly weaken the USD if it begins to seriously impact economic data.
Given these competing pressures, volatility is relatively low, which presents opportunities in the options market. Selling a USD/CAD iron condor with strikes set outside a 1.3900 to 1.4150 range could be a viable strategy to collect premium. This approach profits from the pair remaining range-bound in the coming weeks as these major themes play out.
Alternatively, if we anticipate the US shutdown will be resolved and focus returns to fundamentals, the Canadian dollar looks attractive. Canada’s latest inflation report from Statistics Canada showed inflation remaining sticky at 3.1%, suggesting the Bank of Canada has less incentive to cut rates than the Fed. Buying cheap, out-of-the-money USD/CAD put options could therefore be a low-cost way to position for a stronger Canadian dollar.
