The Canadian Dollar (CAD) slowed its decline against the US Dollar (USD) on Friday, hitting an 18-week low before stabilizing. Even with a boost in Canadian GDP growth for July, the CAD faced challenges due to limited market changes and ongoing pressure from the USD. US inflation data met predictions, keeping market expectations high for another Federal Reserve interest rate cut in October. Even with weaker USD flows, the CAD struggled to gain strength. The USD/CAD exchange rate has been rising since mid-September, suggesting it might reach new resistance levels soon.

Key Factors Influencing CAD

Several key factors influence the CAD, such as the Bank of Canada’s interest rates, oil prices (as petroleum is Canada’s largest export), the country’s economic conditions, inflation, and trade balance. Market sentiment and the performance of the US economy, Canada’s top trading partner, also play important roles. Higher oil prices usually help boost the CAD by improving the trade balance. The Bank of Canada’s interest rate decisions significantly affect the CAD; generally, higher rates strengthen the currency. Inflation often leads central banks to raise interest rates, attracting global capital and increasing demand for the CAD. Economic indicators like GDP, PMI, and job data highly influence the CAD’s value by showing the economy’s strength or weakness. Currently, the US dollar remains strong against the Canadian dollar, even though markets expect a Federal Reserve interest rate cut next month. The USD/CAD has risen above its 200-day moving average, indicating the upward trend has momentum. This suggests that traders might prefer strategies that profit from a rising USD/CAD exchange rate. A major reason for this disconnect is the different outlooks for monetary policy between the two central banks. While the Fed is set to cut rates, Canada’s inflation remains persistent. The August Consumer Price Index (CPI) data, released on September 19, 2025, held steady at 3.1%. This situation may lead the Bank of Canada to maintain high interest rates for a longer period, but currently, the market is focused on the stronger USD trend.

Impact of Oil Prices on CAD

The price of oil, a crucial factor for the CAD, is not providing much support either. West Texas Intermediate crude has dropped from its recent highs and is now around $81.50 per barrel. This decrease in a key Canadian export puts additional pressure on the currency and contributes to the ongoing rise in USD/CAD. Given this steady upward trend, buying call options on USD/CAD might be a wise strategy for the upcoming weeks. This approach allows for potential gains if the pair breaks through the significant 1.4000 psychological level. Using options instead of directly trading the currency pair helps limit and define our maximum risk. Next week, the US Nonfarm Payrolls report is a key event that could bring significant volatility. The last report for August showed a decent, but slowing, addition of 175,000 jobs, keeping the Fed on track for an October interest rate cut. A much weaker or stronger report could lead to sharp movements, making a long straddle an appealing option for those anticipating swings but uncertain about the direction. Looking at the charts, there hasn’t been a sustained push above the 1.4000 level since the market turbulence of late 2022 and early 2023. A clear break above this historical resistance could trigger more automated buying, quickly drawing attention to the 1.4100 level. For now, the most likely direction is upward as long as we stay above the 1.3880 support level. Create your live VT Markets account and start trading now.

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