USD/CAD climbed to about 1.4070 during Asian trading on Tuesday. This rise happened as the US Dollar gained strength against the Canadian Dollar. Traders adjusted their predictions for further rate cuts by the US Federal Reserve. The Fed recently cut its key rate by 25 basis points, bringing it to a range of 3.75% to 4.0%. Fed Chair Jerome Powell mentioned that it’s uncertain if there will be another rate cut in December. Currently, traders see a 70% chance of a rate cut that month, down from 93% earlier. Falling crude oil prices also weakened the Canadian Dollar, which negatively impacted Canada’s currency, known as the Loonie. As the largest oil exporter to the US, lower oil prices usually lead to a weaker CAD.

Bank of Canada Interest Rate Trends

The Bank of Canada recently lowered its benchmark rate by 25 basis points to 2.25%. This continues a trend of rate cuts. Governor Tiff Macklem stated they are ready to respond to significant changes in Canada’s economic situation. Economists expect potential rate cuts next year, even though there is currently a pause. The Canadian Dollar is influenced by several factors, including Bank of Canada interest rates, oil prices, the state of the economy, inflation, and trade balance. US economic conditions also play a significant role. Actions by the Bank of Canada and shifts in oil prices directly impact the currency’s strength. With USD/CAD rising above 1.4070, we are seeing levels not seen since early 2020’s market turmoil. This rise is driven by a stronger US Dollar and falling crude oil prices, suggesting a clear upward trend. The most likely future movement for the pair appears to be upward. The main factor behind this is the widening gap in central bank policies. The Federal Reserve seems hesitant to cut rates further, while the Bank of Canada has cut rates twice and is open to more cuts. This has created an interest rate difference of over 150 basis points, making US dollars more appealing to hold.

Pressure on the Canadian Dollar

The Canadian Dollar is also facing pressure from the energy markets, which are vital for Canada’s economy. WTI crude oil recently fell below $65 a barrel, the lowest level since mid-2023. This is due to recent data showing an increase in inventories, weakening the commodity-linked loonie. Given this situation, strategies that benefit from a rising USD/CAD may be worth considering. Buying call options that expire in late December or January 2026 can help capture potential upside while limiting our maximum risk. This positions us for a move towards the 1.4200 level, not seen in over five years. We will keep an eye on any changes in tone from upcoming Fed officials and on Canadian economic data. This morning’s merchandise trade report showed a wider-than-expected deficit, highlighting the economic impact of US tariffs. Any additional signs of weakness in the Canadian economy might further strengthen the upward trend in USD/CAD. Create your live VT Markets account and start trading now.

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