The USD/CAD pair is close to its 11-week low, around 1.3800, during Monday’s Asian session. It dropped last Friday following the Canadian job report for November, which showed that unemployment fell to 6.5% from 6.9% in October, mainly due to an increase in part-time jobs. Full-time employment grew by 53.6K, down from 66.6K in October. This was better than the expected loss of 5K jobs. As a result, expectations for the Bank of Canada’s (BoC) interest rate cut decreased, with an announcement expected on Wednesday to keep rates at 2.25%.

Trade Relations Uncertainty

Uncertainty in US-Canada trade relations continues to challenge the Canadian Dollar. US President Trump described recent talks as “very productive” but did not provide any details about resuming discussions with Canada. At the same time, the US Dollar is cautious as the Federal Reserve is set to announce its policy soon. The Fed is predicted to cut interest rates by 25 basis points, bringing them to a range of 3.50%-3.75% due to worsening conditions in the US labor market. The BoC’s upcoming interest rate decision follows its eight annual meetings, and its stance on inflation will determine whether rates will change, which will impact foreign capital flows into Canada. The next report is due on December 10, 2025, with market expectations for a rate of 2.25%.

Monetary Policy Announcements

Given the recent strength in Canadian employment figures, the USD/CAD pair may decline further. Canada’s unemployment rate dropped to 6.5%, contrasting with disappointing data from the US, where November showed only 85,000 new jobs and an increase in unemployment to 4.2%. This economic difference is key for trading in the coming weeks. The main event this week will be monetary policy announcements from both central banks on Wednesday, December 10. We anticipate the Bank of Canada will keep its rate at 2.25%, while markets suggest a 92% chance the Federal Reserve will cut its rate by 25 basis points. This growing interest rate gap could put downward pressure on the USD/CAD exchange rate. For traders, buying USD/CAD put options with expirations in late December or January appears wise. This strategy allows participation in a potential decline after the central bank meetings while managing risk based on the premium paid. Aiming for strike prices below 1.3750 could set up a break of recent support. A cost-effective tactic could be a bear put spread, buying a higher-strike put while selling a lower-strike put at the same time. For instance, buying a 1.3750 put and selling a 1.3650 put would lower the initial investment. This setup would benefit from a steady decline toward the mid-1.3600s. The main risk to this bearish outlook is uncertainty around US-Canada trade talks. Any unexpectedly positive news from President Trump could trigger a sharp, likely temporary, rally in the pair. This possibility of sudden volatility makes options a better choice than shorting futures, as the maximum loss is pre-defined. Reflecting on a similar policy divergence in late 2024, the USD/CAD dropped over 300 pips in the two weeks after central bank announcements. Although past outcomes don’t guarantee future results, it showcases how quickly the pair can shift when monetary policies diverge significantly. We view the current situation as a strong opportunity for a similar move. Create your live VT Markets account and start trading now.

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