The USD/CAD exchange rate remains steady above 1.4000 after the US inflation data came in lower than expected. In September, the US Consumer Price Index (CPI) rose by 0.3% month-on-month, which is slightly less than the predicted 0.4%. The annual inflation rate increased to 3% from 2.9%, just below the forecast of 3.1%. Core inflation ticked down to 0.2% monthly and 3% year-on-year. These results fell short of market expectations, suggesting a higher chance of a Federal Reserve rate cut in December.

The US Dollar Influence

The US Dollar Index (DXY) dropped by 0.12% to 98.80 as the market anticipates monetary easing. Nonetheless, the weaker Canadian Dollar keeps the USD/CAD rate above the 1.4000 mark. The soft US Dollar and pressure on the Canadian Dollar help maintain the USD/CAD rate. Key factors like Federal Reserve guidance and oil prices could shift the currency pair’s trend. The table indicates a 0.05% drop in the USD against the CAD, showing the USD’s relative stability. Other changes include a 0.12% decline against the JPY and a 0.18% dip against the GBP. The soft US inflation data has reaffirmed expectations for Federal Reserve easing. Markets are now pricing in nearly a 100% chance of a rate cut next week, with CME’s FedWatch tool showing a 75% probability of another cut in December. This outlook suggests a weaker US Dollar ahead.

Canadian Dollar Headwinds

However, the Canadian Dollar faces challenges that keep the USD/CAD pair above 1.4000. WTI crude oil prices have struggled to hold gains, recently falling below $80 per barrel, which puts pressure on the commodity-linked currency. The Bank of Canada has also taken a cautious stance, diminishing the CAD’s attractiveness. For derivative traders, this scenario creates uncertainty, implying that volatility may be underestimated. Buying long-dated straddles or strangles on USD/CAD could be a smart strategy to prepare for significant movement, whether it climbs higher or falls sharply. This approach benefits from a substantial price swing in either direction before the options expire. If we expect the Fed’s dovish stance to prevail, purchasing USD/CAD put options offers a defined-risk method to bet on a decline. This strategy allows traders to profit from a drop below 1.4000 while limiting potential losses to the premium paid. Look at puts with expirations after the Fed’s December meeting to seize that potential opportunity. We’ve seen similar situations, like during the 2022-2023 hiking cycle when global central bank policies diverged. In those cases, the currency with the more dovish central bank typically weakened, regardless of broader trends. Currently, the balance between the Fed and the Bank of Canada is the key factor to monitor. Create your live VT Markets account and start trading now.

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