USD/CAD has dropped to 1.4040 as the US Dollar faces pressure from the ongoing government shutdown and trade tensions with China. Falling oil prices also limit the strength of the Canadian Dollar, which helps prevent a big decline in the USD/CAD pair. On Thursday, the US Senate failed for the tenth time to move forward with the Republican funding bill. This could lead to the furlough of over 10,000 federal employees, according to the White House. In addition, several members of the Federal Reserve support further interest rate cuts, with the market expecting a 25-basis-point reduction in October.

Trade Tensions and Economic Uncertainties

Trade relations are worsening as the US President admits to a trade war with China, and the US Treasury Secretary further escalates tensions. These developments increase risk aversion, negatively impacting the US Dollar. Lower crude oil prices might actually help support USD/CAD since Canada is a major oil exporter to the US. Additionally, unexpected job growth in Canada for September could influence the Bank of Canada’s decisions on interest rates. A heat map illustrates the percentage changes of major currencies, highlighting the Canadian Dollar’s performance against others. Market movements are rapid, and updates are quickly shared with traders and financial enthusiasts. With USD/CAD stabilizing around 1.4040, we observe a tug-of-war between key economic forces. Domestic political issues and the likely Fed rate cuts weigh down the US Dollar, creating a tricky environment for clear trading decisions. The ongoing US government shutdown adds to the uncertainty, and we shouldn’t underestimate how long it might last. The previous shutdown from 2018-2019 lasted 35 days, costing the economy around $11 billion according to the Congressional Budget Office. This history suggests the current standoff might linger, further harming sentiment for the US Dollar as the month ends.

Oil Prices and Canadian Dollar Dynamics

Meanwhile, WTI Crude oil prices have fallen below $70 a barrel for the first time since May, posing a significant challenge for the Canadian Dollar. Weak global manufacturing data, particularly from China where the PMI has dipped below 50, suggests demand is contracting. This situation supports the USD/CAD pair, preventing it from dropping further despite the weak US Dollar. Given these conflicting factors, strategies that take advantage of low volatility could work well in the next week or two. Selling volatility through options, like setting up an iron condor with strikes outside the recent 1.4000-1.4100 range, may allow traders to collect premiums while the pair remains stable. This strategy benefits from time decay as Washington and oil markets stabilize. However, we must be ready for an eventual breakout since this consolidation phase won’t last indefinitely. A resolution in Washington or a significant shift in oil prices could lead to a sharp move. Therefore, placing orders for a long straddle—buying both a call and a put option—could be a smart way to profit from a large price swing in either direction once the current deadlock ends. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now