Insights 
VT 
USD/CAD experienced modest losses, hovering near 1.3990 during the Asian session on Thursday. The Canadian Dollar (CAD) gained strength due to rising crude oil prices as traders awaited the Canadian Retail Sales report for August.
Crude oil prices approached a two-week high after US sanctions on Russian oil companies, benefiting the CAD. Canada’s position as a major oil exporter to the US supports the CAD when oil prices rise.
Canadian US Economic Ties
Canadian Prime Minister Mark Carney’s statement suggested an end to the growing economic ties between Canada and the US. Meanwhile, traders kept an eye on US-Canada trade tensions.
US President Donald Trump’s refusal to meet Democratic lawmakers until the government shutdown ends suspended key US economic data releases. The Federal Reserve (Fed) is expected to cut interest rates by 25 basis points in October and December.
Fed funds futures indicate a 97% likelihood of a rate reduction, potentially impacting the USD against the CAD. US traders look for guidance from Canada’s Retail Sales data, with expectations of a 1.0% increase in August and 1.2% growth excluding autos.
Key influences on CAD include the Bank of Canada (BoC), oil prices, economic health, inflation, and trade balance. Positive economic signals and rising oil prices tend to strengthen the CAD.
USD CAD Market Drivers
We are seeing a familiar battle around the 1.4000 level for USD/CAD, but the drivers have evolved significantly since the days of the Trump administration’s shutdowns. The key influences now are the differing stances of the Bank of Canada and the Federal Reserve. This policy divergence, coupled with energy market volatility, is what we believe will guide the pair in the coming weeks.
The commodity-linked loonie is finding support from firming oil prices, with WTI crude recently pushing past $88 per barrel, its highest level in two months. This strength is reinforced by the Bank of Canada, which held its interest rate at 4.25% this month. We see their hawkish stance as a clear signal that they remain concerned about inflation.
The outlook for the US dollar has shifted dramatically from the rate-cut expectations we saw years ago. Recent US inflation data for September 2025 came in hot at 3.4%, pushing back against any dovish sentiment. Consequently, futures markets now imply a very low probability of a Fed rate cut before the middle of 2026.
While Canada’s own economic growth showed signs of slowing to just 0.2% in August, the BoC’s firm policy contrasts sharply with a Fed that may have reached its peak. This policy divergence suggests potential for further CAD strength against the USD. We believe derivative traders could consider strategies like buying CAD call options to capitalize on this potential move while managing risk.
