The USD/CAD is currently moving closer to its lower range, between 1.4000 and 1.4080. With limited chances of easing from the Bank of Canada, potential trade and budget developments might boost the Canadian Dollar. In September, Canada experienced higher-than-expected inflation. The Consumer Price Index (CPI) rose to 2.4% year-on-year, marking a seven-month high, up from 1.9% in August. Core CPI also increased to a 19-month high of 3.15%, which is higher than the expected 3.0%.

Inflation And Interest Rates

Given ongoing inflation risks, it is unlikely that the Bank of Canada (BOC) will lower rates below its neutral range of 2.25% to 3.25%. The swaps curve indicates a 75% chance of a 25 basis point cut to 2.25% at the late October meeting, with a small possibility of another cut in the first quarter of next year. As USD/CAD tests the 1.4000 support level, there are few reasons to expect a significant bounce soon. The latest inflation report from Canada, which was unexpectedly high, complicates the BOC’s ability to cut rates significantly. This suggests that the USD/CAD pair may continue to move lower in the upcoming weeks. The inflation data is striking, with core CPI reaching a 19-month high of 3.15%, reversing the cooling we observed in summer 2025. This persistent inflation puts the BOC in a tough spot before its meeting on October 29. While a 25-basis-point rate cut is still anticipated, the strong inflation numbers make further cuts in early 2026 less likely. This situation creates a “hawkish cut” scenario, where the BOC might reduce rates but indicate a long pause, ultimately supporting the Canadian dollar. A similar scenario occurred in late 2023 when persistent inflation forced the central bank to reconsider easing, leading to a significant rise in the CAD. This history suggests that traders should be cautious about shorting the Canadian dollar at this time.

Looking Ahead To Trade And Budget Developments

Looking ahead, two significant events could further strengthen the CAD. Positive discussions around a US-Canada trade agreement expected next week could alleviate some of the pressures on the Canadian economy. Furthermore, the anticipated pro-growth federal budget on November 4 is expected to introduce measures that will boost domestic demand. In light of this, derivative traders might consider positioning for a range-bound or lower USD/CAD. Buying put options with a strike below 1.4000 could be an effective strategy if the current range breaks down. For a more neutral approach, selling call spreads above the 1.4080 resistance level could yield a profit if the pair does not rise significantly from this point. Create your live VT Markets account and start trading now.

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