The Canadian economy is facing challenges, especially in the Toronto housing market, which is declining. This downturn could increase pressure as fewer pre-built homes and condos are sold. Furthermore, uncertainty looms over upcoming US-Canada trade talks. The USMCA agreement will be renegotiated next summer, which may lead to a 15% tariff on goods from Canada and Mexico. While retail sales are strong, job reports are weak, and business investment is dropping. On the bright side, future court decisions that could nullify tariffs might help Canada, but new tariffs could complicate matters.

Exchange Rates and Their Impact

Any new trade deal may not be as beneficial as past agreements. Exchange rates have remained stable between 1.37 and 1.39 since August, largely influenced by Canadian employment figures. However, the Canadian dollar is trending downward, and shifts in the exchange rate could happen if it surpasses 1.3940 into the mid-1.40s. A key factor to watch is the central bank meeting coming up, where a rate cut is highly expected. Experts predict a 53 basis points cut this year, with more cuts likely to keep inflation in check, impacting the Canadian dollar and exchange rates. It’s wise to keep an eye on the Bank of Canada (BOC) as it operates within the 1.37-1.39 range. The market has almost fully priced in a rate cut from the Bank of Canada on September 17. Yet, signs of weakness in the economy suggest we may see more cuts ahead. This creates anxiety for the Canadian dollar. The economy is clearly under pressure, strengthening the case for further rate cuts. Last month alone saw a loss of 15,000 jobs, raising the unemployment rate to 6.4%. This situation is worsened by the troubled Toronto housing market, seeing an 18% drop in sales compared to last year. Adding to these domestic concerns is the uncertainty over US-Canada trade relations. The upcoming renegotiation of the USMCA agreement next summer casts a long shadow. The possibility of a 15% baseline tariff is enough to keep businesses from investing for now.

Trading Strategy and Market Movements

In terms of trading, the USD/CAD pair has been stable within the 1.37 to 1.39 range since August. This consolidation indicates the market’s indecision as we await central bank meetings. We’re waiting for a catalyst to push past this stalemate. Focusing on the 1.37-1.39 range is key, with the BOC and Federal Open Market Committee (FOMC) meetings on September 17 likely to trigger movements. A significant push above 1.3940, especially if spurred by a dovish BOC, could indicate a good time to buy USD calls or call spreads, with a target in the mid-1.40s. This projection suggests the market may need to account for an extra 50 to 100 basis points of cuts next year. Looking back to 2015 may offer some insight. The Bank of Canada cut rates twice to respond to oil price drops while the Federal Reserve raised rates. This policy divergence saw USD/CAD rise dramatically from below 1.20 to above 1.45 in about a year. A similar divergence, even a slight one, could lead to a significant rise in the pair. Create your live VT Markets account and start trading now.

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