The Canadian Dollar (CAD) has lost value against the US Dollar (USD) after Canada’s inflation report for October. The USD/CAD exchange rate is around 1.4040, driven by a strong US Dollar putting pressure on the Loonie. In October, Canada’s Consumer Price Index (CPI) fell to 2.2% annually. This is slightly above the predicted 2.1%, but down from 2.4% in September. Monthly CPI rose by 0.2%, meeting expectations and slightly surpassing September’s 0.1% increase. Core CPI went up by 0.6% in October, raising the annual rate to 2.9% from 2.8%.

Monetary Policy Implications

Canada’s central bank might keep interest rates steady since core inflation remains strong. The Bank of Canada has hinted that it may stop reducing rates if inflation continues to drop. At the same time, US traders are examining delayed economic reports after a government shutdown. Expectations for a rate cut by the Federal Reserve have decreased due to recent strong comments from Fed officials, which continue to support the US Dollar. Additionally, the NY Empire State Manufacturing Index for November exceeded forecasts, coming in at 18.7 compared to an expected 6.0. This supports the US Dollar, which is currently at 99.48 on the Dollar Index. Next, we will see the Nonfarm Payrolls data, a key US economic indicator, which is expected to influence the USD. Analysts predict a gain of 50,000 jobs, following the previous month’s figure of 22,000. The USD/CAD exchange rate rising above 1.40 shows that the market is leaning towards the US Dollar due to differing economic signals. While Canadian headline inflation is easing, the core inflation rate of 2.9% could keep the Bank of Canada from making moves for now. In contrast, the US economic outlook appears stronger, creating a clear policy difference that supports the upward trend of the pair. The Canadian Dollar’s weakness is not just about inflation. Last week’s Canadian retail sales report showed a 0.5% decline in September, highlighting weak consumer demand. With the Bank of Canada on pause, there is little reason to invest in the Loonie, especially while U.S. economic data remains strong.

US Economic Indicators

In the US, the surprisingly high NY Empire State Manufacturing Index has lowered expectations for a rate cut from the Federal Reserve in December. The US Dollar Index (DXY) is stable around 99.48 as traders wait for more concrete data. The focus is now on the labor market to determine the Fed’s next actions. The upcoming Nonfarm Payrolls report on Thursday, November 20, is the highlight of the week. The expected figure is a modest 50,000, following an even lower 22,000 from the previous month. Recent weekly initial jobless claims have been rising, hovering near 240,000, suggesting anticipated weakness in the job market is valid. Given the potential for significant market movement, consider using options for trading. Implied volatility on short-dated USD/CAD options has risen to a 30-day high, indicating that the market is preparing for large price changes. A long straddle could be an effective strategy to profit from major movements in either direction following the NFP release. In the past, a similar situation occurred in 2017-2018 when the Federal Reserve raised rates faster than the Bank of Canada, leading to a sustained increase in USD/CAD. If Thursday’s NFP data exceeds expectations, it could confirm that the Fed is done easing and spark a long-term trend. This presents a favorable opportunity to position for a rise in USD/CAD, possibly through purchasing call options or call spreads to manage risk. A surprising jobs report could lead to major market shifts. A figure above 150,000 would likely solidify the Fed’s hawkish stance, pushing USD/CAD toward 1.42 quickly. On the other hand, a disappointing number could reignite rate cut speculation, causing a sharp decline below 1.39, potentially wiping out unprepared long positions. Create your live VT Markets account and start trading now.

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