Impact of the Long US Government Shutdown

The ongoing US federal government shutdown has now lasted four weeks, creating more challenges. A recent bill failed in the Senate, voted down 50-43. If this shutdown negatively affects the economy, it could weaken the US dollar (USD). Economic data like GDP and job reports are also important in determining the value of the Canadian dollar (CAD). Additionally, the Bank of Canada’s decisions on interest rates can influence the CAD; generally, higher rates strengthen the CAD. As the USD/CAD exchange rate approaches 1.4050, the Canadian dollar is facing a crucial test. This shift is mainly due to low oil prices and anxiety ahead of the Canadian inflation data. Traders should prepare for significant market fluctuations as they assess whether Canadian inflation remains high, impacting the Bank of Canada’s (BoC) future actions. The drop in West Texas Intermediate (WTI) crude oil, which recently fell below $75 a barrel for the first time since May 2025, is another challenge for the loonie. Recent data from the Energy Information Administration (EIA) indicates a rise in US crude inventories, raising concerns about oversupply that is pushing prices down. Since Canada heavily relies on oil exports, ongoing low prices suggest a bleak outlook for the CAD in the short term.

Diverging Interest Rate Policies

Another important factor to watch is the growing difference between the Bank of Canada and the US Federal Reserve’s policies. The Fed has indicated it will keep rates steady to tackle ongoing US inflation, which was reported at 3.5%. In contrast, the BoC is dealing with weaker economic performance. If Canadian CPI data shows signs of slowing down, markets may bet that the BoC will be the first to cut rates in 2026, which would strengthen the US dollar in comparison. In the US, mixed signals are causing uncertainty that derivative traders might find useful. The ongoing government shutdown, which the Congressional Budget Office warns could reduce Q4 GDP by 0.1% for each week it lasts, is a burden for the US dollar. However, this weakness might be balanced by improving trade relations with China, which usually boosts global economic confidence and benefits the greenback. With all these high-impact events happening, using options to manage risk is a smart strategy. We suggest buying USD/CAD call options with a strike price around 1.4100. This approach can help traders profit from potential Canadian dollar weakness while minimizing risk if the inflation data turns out to be unexpectedly high. It’s a way to prepare for a possible market breakout without facing full exposure to a sudden reversal. For those with a strong belief in market direction, the futures market presents an opportunity. If the Canadian CPI data confirms a cooling trend and oil prices do not recover, consider establishing or increasing long USD/CAD futures positions. The aim would be to take advantage of the growing interest rate difference between the US and Canada in the weeks ahead. Create your live VT Markets account and start trading now.

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