The USD/CAD pair is moving lower, nearing 1.4000, during the early European session on Monday. This shift comes after the release of strong employment data from Canada, which diminishes the chances of a Bank of Canada (BoC) interest rate cut this month.

Surprising Canadian Employment Data

Statistics Canada revealed that the unemployment rate in Canada held steady at 7.1% in September, beating the expected 7.2%. Additionally, the economy added 60.4K jobs last month, significantly higher than the anticipated 5K and reversing the previous loss of 65.5K jobs. Last month, the BoC lowered its benchmark rate by 25 basis points. However, following the strong employment data, the likelihood of another rate cut has decreased from 72% to 50% for the upcoming policy meeting. The recovery in crude oil prices could support the Canadian Dollar, given that Canada is the largest oil exporter to the US. At the same time, easing trade tensions between the US and China, spurred by comments from President Trump, may lend support to the US Dollar. The value of the Canadian Dollar is influenced by several factors, including BoC interest rates, oil prices, overall economic health, inflation, and trade balance. Generally, higher interest and oil prices positively impact the CAD, while weak economic data tend to harm it.

Impact on the Bank of Canada Meeting

The strong jobs report has reshaped expectations for the Bank of Canada meeting on October 29. What once seemed like a certain rate cut now appears much more uncertain. Traders should brace for potential volatility in the USD/CAD pair instead of assuming a clear direction. This uncertainty is evident in the options market, with implied volatility for November USD/CAD contracts rising from about 7% to over 9.5% in recent days. A wise strategy might be to buy volatility through a straddle near the 1.4000 mark, which could profit from significant moves in either direction after the BoC’s announcement. This approach prepares for the event itself rather than predicting a certain outcome. Adding to the complexity is the rising price of oil, with WTI crude recently surpassing $88 a barrel for the first time in a month. This trend supports the commodity-linked Loonie but may limit any significant rise in USD/CAD. Still, ongoing positive developments regarding US-China trade may hinder CAD gains, keeping the pair within a fluctuating range. The rationale for the BoC to maintain steady rates is strengthened by recent inflation data, showing that core CPI stubbornly remains at 2.9%, close to the top of the bank’s target range. We encountered a similar situation in late 2023 when markets inaccurately anticipated central bank shifts, resulting in sharp price adjustments. This historical context suggests that being prepared for a surprise is more cautious than solely relying on the consensus. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now