The Canadian Dollar has hit a six-month low against the US Dollar. The USD/CAD pair is now trading at around 1.4019, a rise of 0.45% as the US Dollar gains strength against other currencies. The Loonie’s decline comes from increased demand for the US Dollar due to political unrest in France and Japan. However, the US Dollar’s overall outlook isn’t strong because of an ongoing US government shutdown and expectations of two more Federal Reserve rate cuts this year.

Crude Oil Impact

Crude oil prices, with West Texas Intermediate around $61.50, have also weakened the Canadian Dollar. As oil is Canada’s main export, falling prices usually lead to less demand for the Loonie. Market predictions indicate that the Bank of Canada will cut its policy rate by 25 basis points at its meeting on October 29. The benchmark rate is likely to drop to 2.25% by year-end due to slowing growth and weak labor data. The upcoming Canadian labor market report could affect market direction. The unemployment rate is expected to rise to 7.2%. A weaker report might heighten expectations for additional rate cuts by the Bank of Canada. With USD/CAD clearly above the 1.4000 mark, the trend seems to be moving higher in the coming weeks. Derivative markets are showing signs of weakening for the Canadian dollar, especially with further rate cuts expected on October 29. Currently, there is an 85% chance priced in for a 25-basis-point cut, suggesting a negative outlook for the Loonie.

Canadian Jobs Report

The Canadian jobs report released tomorrow is a key event, and we should expect volatility. After August’s major job loss of 65,500, another disappointing report could push USD/CAD closer to 1.4100. Traders are using short-term options, like weekly straddles, to prepare for possible sharp movements in either direction after the report is out. The drop in crude oil prices, with WTI hovering around $61.50 per barrel, heavily impacts the Canadian Dollar. Recent OPEC+ meetings did not yield further production cuts, and the latest EIA report showed an unexpected rise in US inventories by 3.2 million barrels, indicating that oil prices might stay low. This negative link means buying puts on the Canadian Dollar or calls on USD/CAD could be wise protection against further oil market drops. Nonetheless, it’s important to consider the US economy’s weakness, which may limit this rally in the medium term. The lingering government shutdown and expected more rate cuts from the Federal Reserve are big challenges for the US Dollar. The most recent US Non-Farm Payrolls report for September revealed only 95,000 new jobs, increasing pressure on the Fed to respond. The gap between a cautious Bank of Canada and a possibly easing Federal Reserve calls to mind the 2015-2016 period, when USD/CAD soared towards 1.4600. Due to this uncertainty, there’s rising interest in buying USD/CAD call options with strike prices around 1.4150 and 1.4200 that expire after the BoC meeting. This tension has pushed one-month implied volatility for the pair to 9.5%, suggesting the market anticipates significant price movements soon. Create your live VT Markets account and start trading now.

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