USD/CAD stays above 1.3900 as traders take a cautious stance due to potential US government shutdown risks. The pair is trading around 1.3920 during Asian hours, following losses in the previous session and worries about a possible delay in the US jobs report. President Trump has warned of large federal job cuts if Congress fails to pass a funding bill, raising fears of a government shutdown. Additional uncertainty comes from plans to impose tariffs on pharmaceutical products and to raise tariffs on various goods.

Canadian Economic Outlook

Statistics Canada updated July’s GDP growth to 0.2% and showed no growth in August. This information shifted the market’s focus toward growth indicators and alleviated concerns about an economic downturn. The Canadian Dollar is under pressure from a 3% decline in crude oil prices after Kurdistan resumed exports. They expect initial flows of 180,000-190,000 barrels per day to reach Turkey’s Ceyhan port, which adds to an already oversupplied market. The Bank of Canada impacts the Canadian Dollar by adjusting interest rates to manage inflation. Higher interest rates generally strengthen the CAD, while quantitative easing could weaken it. Oil prices, inflation rates, and overall economic performance also play a role in determining the CAD’s value. Economic data releases, such as GDP and the Manufacturing and Services PMIs, can affect the Canadian Dollar. Strong economic data usually boosts the currency, while weak data can lead to a weaker CAD.

Market Volatility and Strategy

The possibility of a US government shutdown beginning tomorrow, October 1, is creating considerable uncertainty in the market. This situation is raising market fear, as indicated by the VIX volatility index, which has jumped from around 14 to over 19 in just the past week. This environment suggests preparing for erratic price movements and considering strategies that profit from increased volatility, like buying straddles or strangles on major indices. The US Dollar is under pressure from sudden tariff announcements by President Trump and the shutdown threat. The potential delay of this Friday’s jobs report makes it harder to predict the Federal Reserve’s next move. Consequently, traders should be cautious about holding long US Dollar positions and might think about buying put options on USD pairs. The Canadian Dollar is facing challenges from the significant drop in oil prices due to new supplies from Iraq’s Kurdistan region. WTI crude has fallen below $85 a barrel, a level that has historically weighed on the CAD. However, stable domestic GDP data provides some support, making the CAD potentially more resilient against the greenback compared to other commodity currencies. In the USD/CAD pair, the situation is complex, but risks for the US Dollar seem to be increasing. While the Bank of Canada has some leeway, the Federal Reserve appears more cautious, especially with the shutdown risk. This suggests that the pair’s strength above 1.3900 could present a selling opportunity, with put options on USD/CAD becoming increasingly appealing in the coming weeks. The broader market reflects this caution, evident in Gold reaching new highs and government bond yields declining. Looking back at the lengthy government shutdown from 2018-2019, there was a similar flight to safety, which estimated to shave off about 0.2% of US GDP that quarter. This historical pattern emphasizes the value of hedging long equity portfolios or increasing allocations to defensive assets. Create your live VT Markets account and start trading now.

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