The USD/CAD bounced back from its intraday lows after the Canadian Dollar lost some earlier gains. This happened after Canada’s inflation data was released, showing the Consumer Price Index (CPI) rose 2.2% year-on-year in November, which was below what the market expected.

Canada Inflation Data

On a monthly basis, the CPI in Canada increased by 0.1%, down from the 0.2% rise the month before. The Bank of Canada’s core CPI, which they prefer to use, held steady at 2.9% year-on-year in November. However, it fell 0.1% on a monthly basis, down from a 0.6% increase in October. In the US, the New York Empire State Manufacturing Index for December dropped sharply to -3.9 from 18.7. This was much lower than the predicted 10.6, signaling slowing manufacturing activity. Next, the focus in the US will be on the upcoming labor and inflation data, including the delayed Nonfarm Payrolls reports for October and November. Meanwhile, the USD is currently performing best against the New Zealand Dollar among major currencies. A heat map displays the percentage changes across different currency pairs. With Canadian inflation at 2.2% for November, which was softer than expected, the Bank of Canada is less likely to raise interest rates. This view strengthens the belief that the central bank will keep rates steady, limiting the Canadian dollar’s potential strength. For derivatives traders, selling out-of-the-money CAD call options against the USD may be a good way to earn premiums. The Bank of Canada’s policy rate has remained at 4.25% over the last four months of 2025, and the latest inflation data supports this stance. Additionally, recent figures revealed a 0.2% decrease in Canadian retail sales for October, indicating a cooling consumer market. This makes it tough for the Bank of Canada to consider any rate hikes, leaning towards a possible rate cut in 2026.

Primary Strategy For USDCAD

All eyes are now on important US data coming later this week, which will affect the other side of the currency pair. The market is preparing for Tuesday’s Nonfarm Payrolls report for October and November, expecting around a modest 150,000 job gain. If the numbers are stronger than expected, it could show a clear difference in policy between a strong US economy and a slowing Canadian one, likely driving USD/CAD higher. Given the significant event risk from the US, we can expect implied volatility in USD/CAD options to rise in the coming days. Traders might consider buying volatility through strategies like a long straddle, which allows profits from significant price moves in either direction after the US jobs and inflation reports. This strategy is appealing given the crucial decisions facing Federal Reserve policy heading into 2026. Looking back to 2017, unexpectedly strong Canadian economic data led the Bank of Canada to raise rates multiple times, causing the loonie to rise sharply. In contrast, the situation in 2025 shows consistently disappointing data from Canada. This historical comparison suggests that the Canadian dollar’s most likely direction is down, not up. Thus, a primary strategy is to bet on USD/CAD strength, especially if the upcoming US data reflects economic stability. One option is to buy USD/CAD call options with a strike price around 1.3850, set to expire in late January 2026. This lets traders benefit from a potential rise while managing risk if the US data falls short and the pair drops. Create your live VT Markets account and start trading now.

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