USD/CAD rose close to 1.3960 during European trading on Tuesday. Traders are paying close attention to the upcoming US-Canada trade talks. The US Dollar is seen as a safe option amidst political unrest in France, although the ongoing US government shutdown and expectations for a dovish Federal Reserve could limit its gains. The US Dollar Index, which measures the dollar against six major currencies, increased by 0.4% to around 98.50. In Canada, expectations are that 7,500 jobs were added in September, following a significant loss of 65,500 jobs in August.

US Senate Dynamics

On Monday, the US Senate saw no Democratic support for a short-term funding bill. Republicans are sticking to healthcare benefit cuts made earlier this year. There is an 80% chance that the Federal Reserve will cut interest rates by 25 basis points at each of its two remaining meetings this year. Prime Minister Mark Carney and President Donald Trump will meet in Washington to discuss trade. The Canadian labor report is due Friday, and the employment numbers will be closely examined for their economic impact. The Federal Reserve influences the value of the US Dollar through monetary policy, mainly via interest rate changes and, in extreme cases, quantitative easing. Both of these tools can greatly affect the strength of the US Dollar. As USD/CAD approaches 1.3960, the market appears conflicted. The US Dollar is gaining traction as a safe haven due to political issues in France, but this strength is challenged by domestic problems. The threat of a government shutdown and strong expectations for Federal Reserve rate cuts are significant obstacles for the dollar.

Canadian Dollar Outlook

The weakness in the Canadian Dollar seems to be more immediate, driving the pair’s upward trend. The forecast for only 7,500 jobs to be added this Friday is quite weak, especially after last month’s loss of over 65,000 positions. In comparison, Statistics Canada reported monthly job gains exceeding 40,000 throughout most of 2024, showing how poor the current expectations are. Traders should be careful about pushing US Dollar strength too far, as it may not last. The US government shutdown in late 2018 lasted 35 days and led to a drop in the US Dollar Index due to rising economic uncertainty. The current political deadlock over funding bills poses a similar risk that could quickly diminish the dollar’s safe-haven status. The Federal Reserve’s dovish outlook is crucial for the medium term. The market is pricing in an 80% chance of two more rate cuts this year, which puts pressure on the dollar. Reflecting on the Fed’s easing cycle in 2019, the dollar eventually weakened as lower interest rates made it less attractive. With the Canadian jobs report and US-Canada trade talks on the horizon, implied volatility in USD/CAD options is likely to be high. Purchasing short-dated call options could be a strategy to benefit from a potential break above the critical 1.4000 level, which offered strong resistance in 2022 and 2023. This approach limits risk if the news is favorable for the Canadian dollar. For those looking beyond this week, expectations of Fed rate cuts offer another opportunity. Buying USD/CAD put options with later expirations could serve as an effective hedge or position for a reversal, betting that the Fed’s monetary policy will eventually outweigh current short-term Canadian economic weakness. Create your live VT Markets account and start trading now.

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