USD/CAD has weakened to around 1.4100, down 0.1% after hitting a seven-month high of 1.4140. This drop comes after five days of gains as rising oil prices boosted the Canadian Dollar, which is closely tied to commodity prices. ### Crude Oil Concerns Boost Canadian Dollar Concerns over crude oil have helped strengthen the Canadian Dollar, as higher oil prices increase its purchasing power. Canada is a key oil exporter to the US, so rising oil prices support its currency. Investors are focusing on upcoming Canadian economic data, such as the October Ivey PMI and a speech from Bank of Canada (BoC) Governor Tiff Macklem. Recently, the BoC reduced its policy rate by 25 basis points to 2.25%, indicating that they are open to more adjustments if needed. In the US, private-sector job growth exceeded expectations with 42,000 jobs added in October, a significant turnaround from a previous decrease of 29,000. This shows strength in the labor market but lowers hopes for a rate cut by the Federal Reserve in December. The CME FedWatch tool indicates a 62% chance of a December rate cut, down from over 90% the week before. This change supports the US Dollar amid some profit-taking, while the future of USD/CAD will rely on the upcoming Canadian data and Macklem’s statements. The Canadian Dollar has outperformed the US Dollar when compared to other major currencies, according to a heat map shown. ### Short Term View on Canadian Dollar The USD/CAD pair is pulling back from its seven-month high as rising oil prices temporarily bolster the loonie. WTI crude has climbed back above $85 per barrel this week due to new supply concerns, attracting buyers for the Canadian Dollar. This makes short-term bets against the Canadian Dollar riskier until we receive clearer guidance from the Bank of Canada. The longer-term outlook is shaped by the differing central bank policies. The Bank of Canada recently lowered its policy rate to 2.25%, indicating a dovish approach, while the US labor market remains strong with initial jobless claims steady around 215,000. This policy divergence suggests any Canadian Dollar gains may be temporary, favoring a higher USD/CAD in the upcoming weeks. We should pay close attention to Governor Macklem’s speech today for hints about future rate cuts. Increased implied volatility on USD/CAD options is likely ahead of his comments, creating opportunities for strategies like straddles if a significant market move is anticipated. Looking back at market reactions to central bank statements during the high-inflation period from 2022-2023, a surprisingly dovish tone from Macklem could easily push the pair back toward its recent highs above 1.41. In the coming weeks, the strategy should be to view any strength in the Canadian Dollar as a chance to position for a higher USD/CAD. With Canada’s inflation cooling faster than expected to 2.5%, the Bank of Canada has room to cut rates further before the year ends, unlike the Fed. Dips in the pair towards the 1.4050 level could be great opportunities to buy call options or enter long forward positions, aiming for a retest of the 1.4140 peak. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now