USD/CAD is holding steady above 1.4000, trading around 1.4010 during early Asian hours on Monday. The Canadian Dollar (CAD) is rising thanks to higher oil prices, as Canada is the top crude supplier to the US. West Texas Intermediate (WTI) oil is priced at $61.00 per barrel. OPEC+ plans to pause output increases in the first quarter of 2026 after a slight rise next month. Expectations for a US Federal Reserve rate cut in December are dimming. Currently, the rate is between 3.75% and 4.0%. Fed Chair Jerome Powell indicated that a rate cut in December is uncertain, promoting a wait-and-see stance. Traders now see a 69% chance of a December cut, down from 93% a week ago. The US government shutdown is now in its sixth week, creating concerns due to Congressional deadlock. Factors influencing CAD include interest rates in Canada, oil prices, the economy’s health, inflation, and trade balance, while the US economy also affects CAD. The Bank of Canada (BoC) sets interest rates to keep inflation between 1% and 3%. Changes in oil prices strongly impact CAD, as higher prices enhance its value. Economic data like GDP and jobs reports can also sway CAD, with strong results boosting its strength. USD/CAD is currently in a narrow range around 1.4010. This situation resembles a tug-of-war: higher oil prices favor CAD while a cautious Fed supports the US dollar. Derivative traders might see this as a time of stability before a potential price shift. The recent rise in oil prices directly supports the Canadian dollar. OPEC+ announcing a pause in production increases has kept WTI crude near $61 a barrel. This is a relief after seeing prices drop from the $80-$90 range earlier in 2023 and 2024. If oil remains at these levels, it will be tough for USD/CAD to rise significantly. Meanwhile, the US dollar seems stable. After the Fed cut rates twice this year, Chairman Powell’s recent comments have lowered hopes for another cut in December. As a result, market expectations have adjusted, with the chance of a December cut dropping from 93% to 69% in a week. The ongoing government shutdown poses a significant risk for the US dollar. This shutdown has now lasted six weeks, raising concerns about its economic impact. A similar shutdown in 2018-2019 was estimated to have cost the US economy around $11 billion. If this situation harms economic data, it could weaken the US dollar unexpectedly. Given these contrasting influences, volatility is lower, presenting opportunities in the options market. Selling a USD/CAD iron condor with strike prices outside the 1.3900 to 1.4150 range might be a smart move to generate income. This strategy profits if the pair stays within a specific range over the next few weeks. On another note, if we expect the government shutdown to end and focus shifts back to economic fundamentals, the Canadian dollar looks promising. Statistics Canada’s recent inflation report shows inflation steady at 3.1%, indicating the Bank of Canada has less reason to cut rates compared to the Fed. Buying inexpensive, out-of-the-money USD/CAD put options could be a cost-effective way to position for a stronger Canadian dollar.

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