Insights 
VT 
The USD/CAD pair has continued its downward trend, slipping below 1.3700, reaching its lowest point since October 2024. This decline is largely influenced by the weakening US Dollar amid concerns over the US fiscal situation and expectations of a dovish Federal Reserve stance.
The US Dollar Index (DXY) has dropped to a near one-month low, reflecting market concerns about a $4 trillion increase in the US deficit over the next decade. Softer US inflation indicators have further reinforced the belief that the Federal Reserve may cut interest rates to support economic growth.
Canadian Dollar Resilience
Conversely, the Canadian Dollar has been bolstered by stronger-than-expected Canadian core inflation figures. This strength diminishes the likelihood of an interest rate cut by the Bank of Canada, even as crude oil prices experience a slight downtick.
The Canadian Dollar is affected by interest rate levels set by the Bank of Canada, oil prices, economic health, inflation, and trade balance. Higher interest rates and strong economic data are generally supportive of the CAD. Increases in oil prices lead to an improved trade balance, strengthening the currency. Conversely, economic weakness can lead to a decline in the CAD’s value.
With USD/CAD moving convincingly below the 1.3700 mark and reaching a level not seen since October, what stands out now is not only the downward pressure on the greenback but also the quiet resilience underpinning the loonie. There’s clearly been a two-sided metric at work here. On one hand, US fiscal strains and forward-looking inflation statistics are tilting expectations further in favour of a more accommodative monetary path by the Fed. Meanwhile, firmer Canadian inflation data are keeping bets on Bank of Canada rate cuts subdued. These dynamics mark a distinct shift in sentiment.
Taking a look at the US Dollar Index sliding to a near one-month low, the market is not just reacting to inflation trends; it is pricing in future balance sheet stress. The projected expansion of the US deficit by $4 trillion over the next decade carries long-term implications for rates and dollar demand. Regardless of shorter-term moves, such projections tend to lift questions about sustainability and bring discounting activity into FX-pricing models earlier than usual. When inflation data softens alongside such fiscal warnings, we often see added pressure on the dollar, as we did again this week.
Central Bank Dynamics
Payette’s rate-setting division in Canada benefits from this contrast. The Bank isn’t necessarily turning hawkish, but it doesn’t face the same urgency to act in support of growth. Core inflation figures in Canada have run stronger than anticipated, and that alone has been enough to rule out a near-term policy shift. While a gradual softening in oil prices normally dampens the currency, in current context, that traditional drag is being outweighed by better domestic data stability.
This creates a rather delicate environment for positioning. We are now in a phase where pricing in differential moves from central banks demand clarity, precision, and agility. Forward curves tell us traders anticipate a faster pace of adjustment south of the border, and that’s being reflected in rate spreads. With macro spreads widening against the USD, relative value trades are becoming more attractive on the CAD side, especially as momentum improves.
Given how correlations between commodities and currency have waned slightly in recent months, oil’s modest decline hasn’t materially weighed on support for the loonie as earlier models might have suggested. The lack of a strong reaction in CAD to oil softness implies market focus remains fixed on central bank differentiation, and for now, Canada has the upper hand given its inflation profile.
Moving forward, the likelihood of volatility spikes increases around policy statements and key economic releases from either side. It becomes essential for derivative participants not only to hedge directional exposure but also to manage risks around volatility repricing. With rate cut expectations gaining pace in US pricing structures, gamma positioning is likely to shift more aggressively. For this reason, scrutiny around upcoming CPI prints, employment data, and central bank comments will be paramount.
We’ve noticed options markets showing bias in favour of deeper downside strikes in the pair, reflecting positioning rather than just sentiment, particularly beyond one-month tenors. That asymmetry suggests the broader market sees current levels as more than a detour—a possible recalibration point. It reinforces the idea that hedging strategies should not only be near-term focused but also extend into longer calendar spreads or convexity protection.
Maintaining flexibility across tenors has become more rewarding than committing to static delta positions. With front-loaded expectations baked into futures pricing, there’s now a stronger case for adjusting implied volatility assumptions accordingly. If the economic divergence continues at its present pace, re-pricing risk may accelerate, especially once traders start shifting from expectations to execution effects.
