The US Dollar is steady against the Canadian Dollar at 1.4000, but it has a tough time breaking past 1.4020. Recently, the Greenback fell by 0.7% over three days as strong Canadian job data lowers chances for rate cuts by the Bank of Canada. In the US, trading is slow as everyone waits for a congressional vote on a bill to fund the government, which could end the longest government shutdown in history. This delay has put off reports that might clarify the economic outlook and decisions about Federal Reserve rates.

Impact of Canadian Employment

The US Dollar lost some strength due to solid Canadian job growth and hawkish statements from the Bank of Canada. Higher crude oil prices are also putting pressure on the dollar. In the US, disappointing private job numbers have raised concerns about the job market, leading some to hope for a third Federal Reserve rate cut in December. Eyes are also on the Bank of Canada Governing Council’s summary of opinions. Central banks aim for price stability and adjust interest rates to manage inflation. Raising rates controls inflation, while cutting rates boosts economic activity. These policy choices need to balance hawkish and dovish views among central bank leaders, which affects savings, lending, and investment. Currently, the USD/CAD pair is showing some consolidation, but the market dynamics have changed significantly since then. We are now around 1.3750, well below the old support level of 1.4000. This demonstrates a fundamental shift in the market over the years.

Federal Reserve’s Influence

Reflecting on concerns about a US government shutdown, today’s budget discussions appear less risky. Economic data in the US is no longer delayed. In fact, last October, non-farm payrolls added a solid 170,000 jobs, keeping the unemployment rate steady at 3.9%. This stable job market gives the Federal Reserve more flexibility compared to earlier pressures. The Federal Reserve’s current stance is a key factor now, quite different from the earlier rate-cutting cycle. The Fed funds rate remains stable in the 4.75% to 5.00% range as we continue to monitor ongoing inflation issues. This is a stark contrast to the anticipated third rate cut that was expected before. On the Canadian side, the Bank of Canada is maintaining its position, although recent weaker retail sales data has cooled the previously hawkish sentiment. Job growth in Canada is still crucial, and any signs of weakness could lessen the Loonie’s strength. Currently, the interest rate gap moderately favors the US Dollar. Crude oil prices, important for the CAD, are around $85 per barrel for WTI, providing some stability for the currency. This price is healthier compared to the volatility seen between 2020 and 2023. Traders in derivatives should keep an eye on the link between oil price changes and the CAD. With US inflation data due next week, we’re noticing an increase in implied volatility for USD/CAD options. This suggests traders expect a bigger move than usual, making strategies like straddles or strangles useful for potential breakouts. The lower volatility we’ve seen recently is not what we’re experiencing now. Therefore, the 1.4000 level, which was once a floor, should now be treated as significant resistance. If it approaches this level in the coming weeks, there will likely be strong selling pressure unless there’s a major change in central bank policy. Traders should consider positions that treat the 1.3850 area as a more immediate ceiling. Create your live VT Markets account and start trading now.

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