USD/CAD is currently weak, sitting close to its lowest level since October 22. This situation mainly results from different policies from the Bank of Canada and the US Federal Reserve. The Canadian Dollar finds support from rising oil prices and a tough stance from the Bank of Canada, which signals the end of its rate-cutting phase. The Bank of Canada has kept its interest rate steady at 2.25%, thanks to positive data from the third quarter that supports economic growth despite trade tensions. This stable rate, combined with hints of potential future rate hikes, stands in contrast to the US Federal Reserve’s recent cut of 25 basis points, with another cut likely in 2026.

US Federal Reserve’s Market Impact

US Federal Reserve Chairman Jerome Powell has expressed concerns about the labor market, suggesting future rate cuts might be on the horizon. This, along with an overall positive market sentiment, reduces the appeal of the US Dollar as a safe haven, negatively impacting the USD/CAD exchange rate. The Canadian Dollar is affected by various factors, including the Bank of Canada’s interest rate decisions, oil prices, and essential economic indicators like GDP and inflation. A robust Canadian economy boosts the currency as it attracts foreign investment and could lead to higher future interest rates from the Bank of Canada. On the other hand, weak economic indicators could weaken the CAD. With USD/CAD struggling below the 1.3800 level, it seems likely to trend downward over the next few weeks. This weakness was reinforced by last week’s report showing that Canadian employment grew by 35,000 jobs in November 2025, while the US Non-Farm Payrolls report fell short of expectations. The bearish sentiment is creating a clear trend that we must heed.

Monetary Policy Divergence

The primary driver of this trend is the diverging monetary policies of the Bank of Canada (BoC) and the US Federal Reserve. Currently, the market anticipates a 65% chance of a Fed rate cut in the first quarter of 2026, a big shift from a few months ago. In contrast, the BoC appears to be holding steady, creating a notable policy difference that hasn’t been this significant since the aggressive rate hikes of 2022 and 2023. Additionally, the strong oil prices, essential for the commodity-linked Canadian dollar, put pressure on the pair. Following the recent OPEC+ decision to continue production cuts, WTI crude is consistently above $80 a barrel, a level not seen regularly since early 2025. This strengthens the loonie. For those trading derivatives, this outlook suggests selling out-of-the-money call options on USD/CAD with strike prices at 1.3850 or higher could be a smart strategy for generating income. The pair has struggled to hold gains above this level, making these options likely to expire worthless. Alternatively, buying put options could be an effective way to profit from a potential drop towards the October lows near 1.3700. It’s essential to keep an eye on any shifts in broader market sentiment, as a sudden move to risk-off trading could enhance the safe-haven appeal of the US dollar. The upcoming trade balance figures from both countries may also introduce short-term volatility. A significantly stronger-than-expected US report could temporarily disrupt the current bearish momentum. Create your live VT Markets account and start trading now.

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