Canadian currency gains have come from strong employment data, while the US labor market shows signs of weakness. Despite worries about job quality, Canada’s unemployment rate has dropped significantly. Over the past three months, there have been about 26,000 new full-time jobs added each month, and wages have risen. Markets expect the Bank of Canada to start tightening its policies late next year, which could tighten spreads and boost the Canadian dollar. If current predictions are accurate—with the US Fed expected to cut rates by 100 basis points and the Bank of Canada tightening by 50 basis points—the policy spread may shrink from 175 to 25 basis points. The Canadian dollar held its gains from Friday, marking its strongest recovery since April and is now close to its fair value estimate of 1.3801. US dollar losses late last week disrupted a mid-year upward trend, with spot losses hitting the 1.4140 double top target and falling below the 50% retracement level of the June-November rally (1.3840). The current bearish momentum for the US dollar could lead to further declines, potentially reaching the mid-1.37s. Key resistance levels for the USD are between 1.3975 and 1.4025. The economic gap between Canada and the US has widened since late last year. On December 5, 2025, Statistics Canada reported a strong addition of 45,000 jobs, maintaining wage growth at 5.2%. In contrast, the US non-farm payroll data revealed only a weak gain of 150,000 jobs. This highlights Canada’s resilient job market compared to the slowdown in the US. This economic divide has influenced the central bank policies we have anticipated throughout 2025. The Bank of Canada raised its policy rate by 50 basis points this year, while the Federal Reserve has cut its rate by 75 basis points to support a cooling economy. As a result, the interest rate difference has narrowed significantly, supporting the Canadian dollar’s strength. The USD/CAD exchange rate has responded by breaking a bullish trend that persisted throughout 2024. This pair is now testing levels not seen since the summer of that year, with momentum clearly favoring the Canadian dollar. Given the current conditions, we expect losses to potentially reach the 1.3750 support zone in the weeks ahead. For derivative traders, buying USD/CAD put options could be a straightforward way to position for further declines. This strategy allows them to benefit from the Canadian dollar’s strength while keeping risk limited to the premium paid. Additionally, selling out-of-the-money call spreads on USD/CAD could also be considered to generate premium income, given that a significant rally seems unlikely. For those with commercial interests, this trend presents an opportunity. We recommend Canadian exporters consider using forward contracts to sell their future US dollar receivables at these favorable rates. This will lock in profits from the stronger Canadian dollar and protect against unexpected reversals in the currency pair.

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