The USD/CAD pair climbed to about 1.4060 during Tuesday’s early European trading. The Canadian Dollar fell against the US Dollar, driven by lower oil prices and expectations of an interest rate cut from the Bank of Canada, as indicated by its Business Outlook Survey. Canadian businesses noted slightly better conditions, but remain cautious about investments due to US tariffs. Inflation expectations are steady. Money markets show a 77% chance of a 0.25% rate cut in October. The Bank of Canada has already lowered its rate to a three-year low of 2.50%.

Impact Of Crude Oil Prices

Crude oil prices hit a five-month low, which negatively impacted the CAD since Canada is the largest oil exporter to the US. Traders are waiting for Canadian CPI inflation data, expecting a 2.3% rise in September. If CPI is higher than expected, it could support the CAD. The US government shutdown has now lasted four weeks, which may affect the economy and, in turn, the USD. Key factors affecting the CAD include Bank of Canada’s interest rates, oil prices, economic health, inflation, and trade balance. Economic indicators, macroeconomic data, and market sentiment are also important for CAD value. The USD/CAD is stabilizing around 1.4060 as we await today’s crucial Canadian inflation data. A higher-than-expected CPI could briefly boost the Loonie, but overall, the outlook points to weakness for the Canadian dollar. The main drivers are the cautious stance of the Bank of Canada and declining oil prices.

Canadian Dollar Outlook

There are strong indications that the Canadian dollar will weaken further, with money markets predicting a 77% chance of another rate cut from the Bank of Canada next week. This follows last month’s cut and is confirmed by a cautious business outlook survey highlighting the adverse effects of US tariffs. The situation is worsened by WTI crude oil prices, which have dropped below $75 a barrel, down from more than $90 this past summer. In this context, we should consider strategies for further USD/CAD strength using derivatives. Buying call options that expire after next week’s BoC meeting could capture a potential rise if the bank indicates more easing. A bull call spread offers a lower-cost way to express this opinion while limiting our risk ahead of today’s CPI release. This scenario mirrors what happened in 2015 when a significant drop in oil prices led the Bank of Canada to start an easing cycle. During that time, the USD/CAD exchange rate surged over several months. This historical example suggests that the current upward trend could continue if these economic conditions hold. The main risk to this outlook is the ongoing US government shutdown, which has now reached four weeks. This funding lapse may pressure the US dollar, potentially impacting fourth-quarter GDP growth. The shutdown is also delaying the release of important economic data, adding to the uncertainty surrounding the Federal Reserve’s policy decisions. Create your live VT Markets account and start trading now.

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