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Is the Canadian dollar’s “Judgment Day” approaching? Three major contradictions are triggering an exchange rate crisis!

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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market Analysis]: The "Judgment Day" of the Canadian dollar is approaching? Three major contradictions are detonating the exchange rate crisis!". Hope this helps you! The original content is as follows:

On Friday (October 24), the foreign exchange market once again focused on the North American currency pair, with the US dollar against the Canadian dollar trading at 1.4027, up 0.26% from the previous trading day. The rise in this band stems from the Canadian dollar's weak performance amid fundamental uncertainty, while the U.S. dollar index remains in a relatively strong range. The recent market sentiment has been dominated by Canadian economic data and central bank policy expectations, coupled with the repercussions of external trade frictions, the overall trend of the Canadian dollar has tended to be defensive. The trading board shows that USD/CAD has rebounded from last week's low of 1.3899. Although the short-term momentum shows signs of slowing down, there is still no obvious callback signal. This reflects investors' cautious attitude towards the Bank of Canada's decision next week, especially in the context of rising inflation and slowing economic growth.

From a broader perspective, North American currency market volatility has intensified this week. On the one hand, it is due to the relative stability of the Federal Reserve's policy path, and on the other hand, it is the multiple pressures facing the Canadian economy. The unemployment rate remains stubbornly high at 7.1%, and business investment and hiring intentions are sluggish. These factors have pushed the Canadian dollar to the edge of defense. Some active traders and institutional accounts pointed out that recent higher-than-expected inflation readings are quietly changing market bets on the pace of central bank easing. For example, one foreign exchange strategy sharer observed that the Canadian dollar briefly strengthened after the data was released, but then faced the squeeze of the U.S. dollar rebound, which was in sharp contrast to the overall economic weakness. Another trading observation post emphasized that core inflation indicators exceeded expectations, which is forcing policymakers to reassess the pace of easing, thereby injecting short-term resilience into the Canadian dollar, but also exposing the fragility of the exchange rate. These first-line feedbacks highlight the market's sensitivity to policy changes and remind traders to be wary of disruptions to the market caused by unexpected news.

Fundamental Analysis: The central bank’s easing expectations dominate, and external uncertainties amplify risks

The Bank of Canada will announce its policy decision on October 29, and this meeting has attracted much attention. Most economists expect the central bank to cut the overnight interest rate by another 25 basis points to 2.25%, which will be the second consecutive interest rate cut. As early as last month, the central bank had implemented a total of 250 basis points of easing adjustments, ranking among the forefront among G10 countries. This round of actions is aimed at injecting impetus into the sluggish economy, filling the output gap, and gradually easing unemployment pressure. According to a survey by economists from well-known institutions, 23 respondents, accounting for nearly 70%, are optimistic about this reduction. Only a few have a wait-and-see attitude and believe that it needs to be discussed again in December. Institutional www.xmhouses.comments also echoed this consensus. A macro analyst bluntly stated in a post: "The priority is still to boost economic momentum and help the unemployment rate fall." This is in line with the recent statements of the central bank governor, which is to pay more attention to the weighing of potential risks.

The core supporting this expectation lies in the downturn in economic fundamentals. Canada's GDP shrank by an annualized rate of 1.6% in the last quarter, with the export sector bearing the brunt of the risk aversion triggered by U.S. tariff remarks. Exports of key categories such as steel, aluminum and automobiles are under pressure, and the sudden interruption of trade negotiations has further dampened business confidence. Although the U.S.-Mexico-Canada Agreement (USMCA) faces a review period next year, the continuity of the current exemption mechanism has become a market concern. Economists from well-known institutions warn that if negotiations fail to extend the agreement framework, tariff risks may amplify downward pressure on the economy, leading to the need to restart the easing cycle in 2026. A member of the trading www.xmhouses.community shared: "The echoes of trade friction are leaving the Canadian dollar on thin ice. Although the central bank's easing is a buffer, external variables dominate the exchange rate narrative."

At the same time, inflation dynamics add to the www.xmhouses.complexity of decision-making. CPI rose to 2.4% last month, accelerating recovery from 1.9% in August, and core indicators also exceeded expectations. Although this does not deviate from the central bank's target of 1%-3%, it has made some economists have reservations about further cutting interest rates. In the survey, 21 experts predicted that the overnight interest rate will remain at 2.25% until the end of next year, just hitting the lower limit of the central bank's neutral range, which will neither stimulate nor inhibit activity. Only a few are betting on a dip below 2%, citing the stickiness of inflation and the potential for stronger fiscal support - with the federal budget expected to inject additional stimulus in early November. An RBC economist pointed out in a recent interview: "The space for exceeding 2.25% is limited. Stubborn inflation coupled with fiscal expansion will test the central bank's balancing art." Traders said, "The hot CPI data has extinguished the illusion of multiple rounds of interest rate cuts at the end of the year. The Canadian dollar may get some breathing space in the short term, but it will still be anchored by policy in the long term."

The outlook for economic growth is equally bleak. The survey median shows that GDP rebounded by 0.5% on an annualized basis in the last quarter, and is expected to expand by 0.9% in this quarter. The average growth rate for the whole year and next year is only 1.2%, which is further revised down from the 1.3% estimated in July, which is the lowest level since the epidemic. The unemployment rate is expected to hover at 7.1% until the second half of next year, with consumption and investment recovering slowly. Together, these indicators reinforce the need for easingAlthough important, it also highlights the structural weakness of the Canadian dollar's dependence on policy. Traders should note that external factors, such as the aftermath of the Russia-Ukraine situation, are being indirectly transmitted to Canadian exports through energy and www.xmhouses.commodity channels, amplifying exchange rate fluctuations.

Technical review: The kinetic energy gradually diverges during the upward shock

Turn to the technical level, the USD/CAD daily chart shows a typical shock upward pattern, which is bullish in the short term but accompanied by differentiation signals. The Bollinger Bands (20,2) indicator shows that the middle track is located at 1.3990, the upper track is 1.4081, and the lower track is 1.3899. The price is currently running close to the middle and upper range, implying that the upward momentum has not been exhausted, but the pressure on the upper track has become a key test. The recent rebound from the lower track of 1.3899 has a clear arc, with a cumulative increase of more than 130 points, reflecting the continued squeeze of the strong US dollar on the Canadian dollar.

The MACD(12,26,9) indicator further supports this dynamic: the DIFF line is at 0.0041 and the DEA line is at 0.0047. Both are in the positive range, but DIFF is slightly lower than DEA, and the kinetic energy of the histogram is tending to converge. This indicates that the short-term bullish advance may encounter resistance and the risk of potential correction increases, especially if the price retests the mid-range 1.3990. In the www.xmhouses.comparison of historical highs and lows, the current level has broken away from the previous low (about 1.3899), but there is still room to reach the peak during the year. Traders often use this as a watershed between long and short.

In terms of trading volume, as the US dollar index stabilized this week, short positions in the Canadian dollar accumulated significantly, and the market consensus pointed to speculators' net short tilt towards CAD. At the support level, the middle rail of 1.3990 coincides with the previous low, forming the first line of defense; if the upper rail of 1.4081 above is broken, it may test the monthly high. Overall, the technical picture reinforces the fundamental narrative: the Canadian dollar is under pressure amid expectations of easing, but inflationary resilience may provide a breathing window. In trading, you need to be wary of disruptions to indicators caused by breaking news. If the central bank's statement exceeds expectations, the fluctuations will be amplified.

Outlook: The exchange rate path stabilizes under policy anchoring, and we should be wary of external variables

Looking ahead to next week and beyond, the Bank of Canada’s policy path is expected to be anchored in the 2.25% neutral range. Radical adjustments are unlikely to be seen in the short term, which will provide a relatively stable support framework for the Canadian dollar. Although economic growth is sluggish, the potential rebound in Q4 and fiscal buffers may ease downward pressure. If inflation remains on target, exchange rate fluctuations will tend to converge. The USD/CAD market may fluctuate in the range of 1.3950-1.4080. If the strength of the U.S. dollar continues, it will maintain mild upward pressure on the Canadian dollar. However, the progress of trade negotiations will become a turning variable-if the aftermath of tariff remarks subsides, the Canadian dollar will have room to rebound.

In the long term, the outlook for interest rates in 2026 depends on the external environment. If the USMCA review goes smoothly, the central bank may suspend easing and turn to monitoring employment and growth; conversely, trade uncertainty may reignite expectations of interest rate cuts, pushing USD/CAD to new highs. Traders' consensus is gradually reaching consensus: the Canadian dollar's resilience stems from policy buffers, but external frictions are still a "black swan" for the exchange rate.

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Is the Canadian dollar’s ​​“Judgment Day” approaching? Three major contradictions are triggering an exchange rate crisis!

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Is the Canadian dollar’s “Judgment Day” approaching? Three major contradictions are triggering an exchange rate crisis!