The USD/CAD exchange rate stabilized around 1.4030 after strong Canadian inflation data suggested less likelihood of a Bank of Canada rate cut. The Canadian Dollar initially weakened but recovered as the Consumer Price Index (CPI) rose by 2.4% year-over-year in September, beating the expected 2.3%. Monthly, Canada’s CPI saw a 0.1% increase, recovering from a prior dip, thanks to smaller decreases in gasoline prices and rising food costs. Core CPI also posted a 0.2% rise month-over-month and a 2.8% increase year-over-year. As a result, swap markets reduced the chances of a 25-basis point rate cut from the BoC to 74% from 86%.

Impact Of Falling Oil Prices

Even with the positive data, the Canadian Dollar is still pressured by falling oil prices. WTI Crude Oil is now close to five-month lows, trading at about $57 per barrel. Meanwhile, reduced trade tensions with China are supporting the US Dollar, which is strengthening against other major currencies. The US Dollar Index has reached a one-week high of 98.84, marking three consecutive days of gains. Attention is now on the upcoming US CPI data on Friday, which could influence the Federal Reserve’s future decisions. Today, the US Dollar is the strongest against the Japanese Yen. Thanks to last week’s surprising inflation figures, the Canadian Dollar has gained some support. The latest Statistics Canada report revealed a year-over-year CPI increase to 3.1% for September 2025, well above the 2.8% that markets expected. This has traders quickly reevaluating the chances of a BoC rate cut before the end of the year. Looking back, a similar situation occurred in the past when a strong September CPI reading of 2.4% dropped rate cut probabilities from 86% to 74% in just one day. This history demonstrates how sensitive the market is to unexpected inflation and how swiftly the outlook on the BoC can change. We should expect similar volatility around central bank announcements in the coming weeks.

Strategies For Derivative Traders

For derivative traders, the sudden change in rate expectations makes options on USD/CAD particularly appealing. With the pair near 1.4050, the rising uncertainty suggests that option premiums, or volatility, will likely increase before the next BoC meeting. A long straddle strategy could be effective for taking advantage of a big price movement in either direction without predicting the direction of the move. This situation is complicated by robust crude oil prices, which differ from past conditions. West Texas Intermediate is currently priced around $85 a barrel, typically providing strong support for the commodity-linked Canadian Dollar. However, this support is being overshadowed by the significant impact of divergent central bank policies. On the other side, the US Dollar remains strong, bolstered by the latest non-farm payroll report indicating the US economy added 210,000 jobs in September 2025. This strength suggests that the Federal Reserve may maintain its current stance, creating a policy conflict with the BoC. This dynamic could keep USD/CAD relatively steady but susceptible to sharp movements on new economic data. In the lead-up to the BoC’s next interest rate decision, traders might consider using call options to bet on the continuing strength of the US Dollar against any hawkish signals from the BoC. Conversely, put options could position traders for a surprisingly aggressive stance from the BoC that might allow high oil prices to lift the Canadian Dollar. Timing these moves around key data releases and central bank statements will be crucial. Create your live VT Markets account and start trading now.

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