The USD/CAD pair experienced a slight drop during the Asian session on Thursday, falling below the mid-1.3900s due to a small dip in the US Dollar (USD). This follows a bounce back from lows not seen since September 25, while it remains below the 200-day Simple Moving Average. The Canadian Dollar (CAD) found support from the Bank of Canada’s recent strong approach. Although the BoC lowered its interest rate, it hinted at pausing further cuts, which has helped the CAD, even with low Crude Oil prices. On the other hand, the USD retreated from a recent two-week high after the Federal Reserve’s assertive rate cut. The Fed reduced borrowing costs by 25 basis points due to concerns in the labor market but signaled that no further cuts are expected soon. Additionally, the Fed plans to stop reducing its balance sheet by December, which may limit further losses for USD/CAD. Market focus is now on the upcoming meeting between US President Donald Trump and Chinese leader Xi Jinping, which is expected to create market volatility. This meeting could significantly affect USD movements and the currency pairs discussed.

Trade Agreement Meeting

After the meeting between Presidents Trump and Xi, the US Dollar has weakened, as no new trade agreement was reached. This pushed USD/CAD below the crucial 1.3950 level, but we should be cautious about predicting a sharp drop. The situation is now a balancing act between central bank policies. The Bank of Canada recently cut its rate to 2.25% while indicating a pause, which supports the Canadian Dollar. The latest data from Statistics Canada shows annual inflation steady at 2.1%, slightly above the target. This gives the BoC little reason to cut rates further, strengthening the loonie. Meanwhile, the Federal Reserve has also indicated a pause after its own rate cut, limiting how much the US Dollar can decline. The latest Non-Farm Payrolls report showed job growth slowing to 145,000, explaining the cut. However, with core inflation stable around 2.0%, the Fed is likely to proceed cautiously. The narrowing policy differences between the two central banks could keep USD/CAD within a certain range.

Market Volatility and Strategy

This environment is reminiscent of the volatility seen during the 2018-2019 trade disputes, where market sentiment could shift dramatically with a single headline. The inability to secure a trade deal has raised concerns about global growth, which might eventually impact commodity prices like oil and limit the Canadian Dollar’s strength. This creates a mixed outlook, with policy supporting the CAD but macroeconomic risks opposing it. Given these conflicting factors, we expect volatility to be the most likely outcome in the coming weeks. Implied volatility in CAD options was near multi-month lows before the meeting, but this trend is likely to change. Traders may want to explore strategies that benefit from significant price swings in either direction, such as buying straddles, rather than just taking a straightforward directional position on the pair. Create your live VT Markets account and start trading now.

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