The USD/CAD exchange rate dropped to about 1.4100 during the early European session on Thursday. This marks the end of a five-day upward trend, driven by rising crude oil prices that support the Canadian Dollar. Canada is set to release its October Ivey PMI data today, and the Bank of Canada Governor will also be speaking.

US Dollar Stays Steady Amid Payroll Growth

In October, US private payrolls rose by 42,000, exceeding expectations and providing some support to the US Dollar. Earlier data from Automatic Data Processing showed a job decrease of 29,000, revised from a 32,000 decrease, while the market had expected 25,000 new jobs. Speculation continues about potential Federal Reserve rate cuts, with a 70% chance now, down from 93% last week. Rising crude oil prices are likely to help the Canadian Dollar because Canada is the biggest oil exporter to the US. Higher oil prices mean more benefit for Canada. The Bank of Canada also recently cut its benchmark interest rate by 25 basis points to 2.25%, indicating a readiness to adjust based on economic conditions, following their second consecutive rate cut. The USD/CAD pair is easing from its recent highs and is trading around 1.4100. While this is a minor decline, it follows five days of US dollar gains. This break allows us to evaluate the mixed influences before making decisions for the upcoming weeks. The main factor here is the differing monetary policies between the Bank of Canada and the US Federal Reserve. The Bank of Canada has lowered its key interest rate to 2.25%, signaling a clear easing approach. Meanwhile, the Fed is being more cautious, with a 70% chance of a December rate cut now in the market. The BoC’s decisions reflect a slowdown in the Canadian economy and inflation. After previously rising significantly, Canada’s core inflation rate has now stabilized near the bank’s 2% target, allowing Governor Macklem to promote growth. This economic weakness limits the Canadian Dollar’s potential strength.

Crude Oil’s Effect on the Canadian Dollar

On the US side, although the latest private payrolls figure of 42,000 was better than expected, it still indicates a weakening labor market. The US economy isn’t performing as strongly as it did in 2023 and 2024, which is why rate cuts are still on the table. The current debate is about when, not if, these cuts will happen. A significant factor supporting the Canadian Dollar is the rebound in crude oil prices, with WTI now above $82 a barrel. As a top oil exporter, higher energy prices benefit Canada, potentially capping how high the USD/CAD pair can rise. For derivative traders, this situation suggests that implied volatility might be undervalued. With the central bank policies diverging and oil prices boosting the CAD, options strategies that profit from large movements, like long straddles, could be useful around important data releases. We should keep an eye on today’s Ivey PMI data and Macklem’s speech for immediate influences. Looking forward, the key point will be the pace of economic decline in Canada compared to the US. If US economic data weakens more than Canada’s, the Fed may need to cut rates more aggressively, weakening the recent dollar rally. Therefore, we should stay alert and closely monitor the upcoming employment and inflation reports from both countries. Create your live VT Markets account and start trading now.

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