The USD/CAD is currently trading near the upper end of a multi-day range, between 1.4000 and 1.4080. Canada’s September Consumer Price Index (CPI) is expected to rise to 2.2% year-on-year, up from 1.9% in August. Core CPI is projected to stay steady at 3% year-on-year. An increase in CPI could lead to expectations that the Bank of Canada (BOC) might consider cutting rates, which could push USD/CAD rates up to 1.4160. With a weak growth outlook for Canada, the BOC has room to lower its policy rate within the neutral range of 2.25% to 3.25%. Right now, there’s an 80% chance of a rate cut to 2.25% at the BOC’s meeting on October 29.

Business Outlook Survey

The Bank of Canada’s third-quarter Business Outlook Survey shows a drop in the sales growth index to -2, the lowest since Q2 2023. Weak demand is affecting price expectations and profit margins, leading to a dim business outlook. Investment plans remain low, below long-term averages, and most businesses are not looking to hire new employees. As USD/CAD tests the high end of its recent range near 1.4080, we are closely monitoring today’s September inflation report. The market already expects a high chance of a BOC rate cut on October 29, with swaps data indicating over an 80% likelihood of a 25 basis point decrease. A lower-than-expected inflation reading would likely reinforce these expectations and drive the pair higher. The outlook for a rate cut is supported by worsening economic data beyond just inflation. Statistics Canada’s latest report revealed a surprising loss of 15,000 jobs in September, raising the unemployment rate to 6.4%. This trend matches the BOC’s Q3 Business Outlook Survey, which recorded the lowest projected sales growth since the second quarter of 2023.

Policy Divergence

This weakness in Canada sharply contrasts with the relative stability of the U.S. economy, creating a clear policy divergence. While we expect a BOC rate cut, the CME FedWatch Tool indicates that futures markets see almost no chance of a Federal Reserve rate cut before next year. This widening gap between the two central banks’ paths is a strong reason for continued strength in USD/CAD. Given this context, we believe it makes sense to position for a break above the current resistance at 1.4080. Traders might consider buying short-dated call options on USD/CAD with a strike price of around 1.4100 to take advantage of a potential move toward the 1.4160 target. This options strategy offers a way to capture upside volatility surrounding today’s data and the upcoming BOC meeting while limiting risk. Alternatively, a bullish call spread could reduce the upfront cost of the trade while still profiting from an upward move. For example, one could buy a 1.4100 call option and simultaneously sell a 1.4200 call that expires in the coming weeks. This mirrors the situation we saw in late 2023 when concerns about a recession in Canada led to significant CAD underperformance against the dollar. Create your live VT Markets account and start trading now.

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