The U.S. Federal Reserve is expected to lower interest rates for the third time in a row by 25 basis points. This decision comes after a split within the FOMC and signals suggesting a rate cut, even though inflation remains above 2%. In contrast, the Bank of Canada is likely to keep its interest rates steady. Officials have stated that the current rate is suitable for keeping inflation stable while promoting economic growth amid uncertainty. Upcoming trade data from Canada is crucial. Experts predict a 3.4% increase in merchandise exports and a 3.1% decrease in goods imports. These figures will help assess the third-quarter GDP data. The U.S. Census Bureau’s trade data will also be carefully examined to see if CUSMA exemptions continue to support Canadian exports to the U.S. in September. This trade information is significant for understanding economic impacts. We are now seeing the effects of the policy difference that started in late 2024. The U.S. Federal Reserve has made the expected rate cuts, while the Bank of Canada has held its rates longer, creating a noticeable economic gap between the two countries that we can leverage in trading. With the recent U.S. inflation report for November 2025 showing the core CPI dropping to 2.8%, we think the Fed can ease policies further in 2026. Traders might consider using SOFR futures to prepare for at least two more rate cuts by mid-next year. This perspective is supported by recent data showing slower retail sales, indicating that U.S. consumers are starting to pull back. The U.S. economic slowdown is also increasing uncertainty, leading to greater market volatility. The VIX index has risen from its lows, recently reaching 19 after a disappointing November jobs report showed only 85,000 new jobs. We suggest that buying VIX call options or VIX futures contracts for February 2026 could be a smart way to protect against a potential market decline. In Canada, the situation looks more defined. Statistics Canada reported inflation for November at just 2.4%, which gives the Bank of Canada a clearer path to reduce rates more aggressively than the Fed. We find value in derivatives that bet on a steeper Canadian yield curve, as short-term rates are likely to drop faster than long-term rates. This widening gap in central bank policies makes the currency market particularly intriguing. The USD/CAD exchange rate has been hovering around 1.38, but underlying factors suggest further weakness for the Canadian dollar. We believe that buying USD/CAD call options with a strike price of 1.40 expiring in March 2026 is a profitable strategy to take advantage of this divergence.

here to set up a live account on VT Markets now