Impact of Oil Prices and Trade Tensions

The USD/CAD has risen slightly by 0.20% to 1.4040 but is finding it tough to surpass the 1.4050 resistance level. The Canadian Dollar is weak against the stronger USD, largely due to the Federal Reserve’s cautious approach on interest rates. The likelihood of a 25-basis-point cut in December has dropped to 69%, down from over 90%. The ongoing U.S. government shutdown is hurting market confidence and decreasing interest in commodity-related currencies like the Canadian Dollar. Falling Oil prices are also putting pressure on the Canadian currency. West Texas Intermediate Oil is at $60.50, partly because of the stronger U.S. Dollar, even though OPEC+ has decided to halt production increases until 2026. Trade tensions between Canada and the U.S. are impacting market feelings as well. Analysts warn that a rise in the Canadian Dollar may take time due to these risks. All eyes are now on the U.S. Institute for Supply Management’s Manufacturing PMI for October, since traditional data releases are blocked by the shutdown. The U.S. Dollar is showing mixed performance against major currencies, with notable strength against the Swiss Franc and some weakness against the Canadian Dollar on this day. With ongoing pressures on the Canadian Dollar, we expect the upward trend in USD/CAD to continue in the near future. The combination of a strong U.S. Dollar and dropping Oil prices makes it hard for the loonie to gain strength. This situation suggests that bearish positions on the Canadian Dollar could be beneficial.

Federal Reserve and Strategy Implications

Oil prices play a key role, as WTI has dropped toward $60.50 a barrel. This decline occurs despite OPEC+ promising to remain disciplined in their production, indicating that the market is more concerned about immediate demand. Last week’s U.S. Energy Information Administration (EIA) report showed a surprising inventory increase of 2.1 million barrels, raising worries about a supply excess that negatively impacts Canada’s main export. Meanwhile, the U.S. dollar is gaining support from a cautious Federal Reserve. Following last week’s meeting, the market has significantly reduced the chances of a December rate cut to 69%, a stark fall from over 90% just one week prior. With core PCE inflation steady around 2.8% year-over-year, the Fed has little incentive to rush into rate cuts, especially during the government shutdown, which delays important economic data. For traders using derivatives, this scenario suggests strategies that benefit from a rising USD/CAD exchange rate. We recommend buying call options on USD/CAD, which allows participation in any upward movement while keeping risk in check if momentum stalls around the 1.4050 resistance. Historically, we haven’t seen USD/CAD sustain similar levels since the oil price crash in early 2016 and the market chaos of March 2020. A solid break above 1.4050 could signal a move toward 1.4200 in the upcoming weeks, making trades targeting this next increase a smart choice. The ongoing government shutdown, now in its sixth week, adds complexity by increasing market volatility. Options can be a useful risk management tool since the lack of official economic reports leads to sharp market reactions to the few available data points, like today’s ISM Manufacturing PMI. Be ready for sudden, sentiment-driven movements instead of slow trends. Create your live VT Markets account and start trading now.

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