The USD/CAD is falling as the US Dollar loses value due to a drop in US Consumer Confidence. In October, Consumer Confidence fell to 94.6 from 95.6 in September. The Bank of Canada (BoC) and the Federal Reserve (Fed) will soon announce their interest rate decisions, both expected to cut rates by 25 basis points. The Canadian Dollar is gaining strength against the US Dollar, with USD/CAD trading at about 1.3944, a drop of 0.30%. The Present Situation Index increased to 129.3, but the Expectations Index declined to 71.5, remaining under 80 for nine months. Inflation expectations for the coming year rose to 5.9%.

The US Dollar Index DXY

The US Dollar Index (DXY) has fallen to around 98.63. All eyes are on Wednesday’s rate decisions. The BoC is expected to cut rates by 25 basis points to 2.25%. This follows a 1.6% contraction in Canada’s economy during Q2 and an unemployment rate of 7.1%. The Federal Reserve is also likely to announce a 25 basis point cut due to weaker inflation data. Traders see a 96.7% chance of this happening. The Canadian Dollar is performing better than the British Pound. A currency heat map showing changes against major currencies indicates that the CAD is stronger compared to several others. Today, the Canadian Dollar is rising against the US Dollar, pushing the USD/CAD lower towards 1.3944. This is driven by disappointing US Consumer Confidence data, which has dropped for two consecutive months. Markets are becoming more cautious about the US economy ahead of tomorrow’s important central bank decisions.

The Central Bank Decisions

Both the Bank of Canada and the Federal Reserve are expected to cut interest rates by 25 basis points tomorrow. The CME FedWatch Tool shows a 96.7% chance of the Fed’s rate cut, meaning it’s already reflected in current prices. Thus, any immediate market reaction might be limited unless there is an unexpected announcement. For traders in derivatives, the high likelihood of these cuts suggests that implied volatility on very short-term USD/CAD options is likely elevated. Strategies that could benefit from a decline in volatility after the announcements include selling a short-dated straddle. This would be advantageous if the central banks announce as expected and the market stabilizes afterward. Looking ahead, the focus will shift from the cuts to the guidance provided by both central banks. We will pay attention to any differences in tone between the Fed and the BoC to gauge the future direction of the currency pair. The bank that hints at a longer or deeper easing cycle is likely to see its currency weaken more noticeably than the other. This situation is similar to the coordinated easing efforts seen during slower periods in the late 2010s, before the pandemic. Current US jobless claims are also slowly increasing, recently reaching a six-month high of 245,000, raising concerns for the Fed. In Canada, a global slowdown could increase pressure on West Texas Intermediate crude prices, which have softened to around $78 a barrel, potentially creating headwinds for the loonie despite its current strength. Create your live VT Markets account and start trading now.

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