The Canadian Dollar (CAD) fell against the US Dollar (USD), approaching its lowest point in six months. This drop is part of a larger trend, with the Loonie struggling against the Greenback for several months. The Bank of Canada (BoC) notes that Canadian businesses feel slightly better about economic conditions, but worries about a recession continue. At the start of the week, the USD/CAD exchange rate rose by 0.13%. Just over a quarter of Canadian businesses expect a recession within the next year, although this is a small improvement from earlier predictions. Investors are looking forward to Canadian Consumer Price Index (CPI) data, but the US CPI numbers are seen as more influential this week.

Technical Indicators

The CAD’s 50-day Exponential Moving Average (EMA) has crossed above the 200-day EMA, which is often a positive signal. The exchange rate has stabilized above 1.40, continuing the upward trend from September. Although it is approaching overbought levels on the Relative Strength Index (RSI), the pair shows strong momentum and could rise further as long as it stays above 1.39. Key factors that affect the Canadian Dollar include BoC interest rate policies, oil prices, the state of the economy, and the trade balance. Rising oil prices can strengthen the CAD, as they boost export revenue. Generally, inflation and positive economic indicators also support the CAD by attracting investments and influencing interest rates. Looking back, it’s noteworthy how the market reacted to the USD/CAD breaking above 1.40, a level we haven’t seen since early 2024. Currently, the exchange rate is closer to 1.3650, as the previous bullish momentum has clearly weakened. The technical situation has shifted, with the 50-day moving average now in danger of falling below the 200-day average.

Policy Divergence

A major factor now is the growing difference in policies between the Bank of Canada and the U.S. Federal Reserve. Canadian inflation eased to 2.5% last month, supporting the BoC’s more cautious approach and fueling speculation about a rate cut in early 2026. In contrast, U.S. inflation remains above 3%, leading the Federal Reserve to maintain its strategy of high interest rates for a longer period. This policy gap is putting pressure on the Loonie, a situation worsened by declining energy prices. West Texas Intermediate crude oil has dropped below $75 a barrel due to concerns about slowing global demand, which is a sharp change from last year’s stronger oil market. This decline directly affects one of the Canadian dollar’s main sources of strength. For traders, this environment suggests a bearish outlook on CAD against USD in the coming weeks. We see growing interest in buying USD/CAD call options with strike prices around 1.3750 and 1.3800, aiming for a gradual rise. Another strategy could be to sell out-of-the-money CAD calls, which allows traders to collect premiums while betting against substantial strength in the Loonie. Our immediate focus will be on Canada’s employment report due early November and the BoC’s upcoming announcement. Any further signals of a slowing Canadian economy will likely strengthen USD bulls. We should also keep an eye on U.S. retail sales figures for any surprises that could change the Fed’s stance. Create your live VT Markets account and start trading now.

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