The USD/CAD pair rebounded slightly as the US Dollar stabilized after losses tied to disappointing US inflation data. In November, the Consumer Price Index (CPI) in the US rose by 2.7% year-on-year, lower than the expected 3.1%, and down from 3.0% in September. The Core CPI also decreased to 2.6%. This weaker inflation data strengthened the belief that the Federal Reserve might cut interest rates by 2026, with markets expecting two cuts next year. Currently, the outlook favors the Canadian Dollar since the Federal Reserve is easing rates while the Bank of Canada maintains its interest rate at 2.25%, reflecting steady inflation and strong economic activity.

Upcoming Economic Data Releases

Attention is now on upcoming economic reports from Canada and the US, especially Canadian Retail Sales and US Existing Home Sales. The University of Michigan will also release indices for Consumer Sentiment and Consumer Expectations, as well as surveys on one-year and five-year inflation expectations, which will provide more insights into the economic situation. Overall, the Canadian Dollar performed strongest against the Euro in today’s market movements. The US inflation rate of 2.7% confirms the ongoing disinflation trend we’ve seen over the last two years, significantly down from the highs above 8% in 2022. This trend signals further potential weakness for the US Dollar against the Canadian Dollar. We view the pair’s rise to 1.3770 as just a temporary stabilization before another drop. The key point is the growing difference between policies: the Federal Reserve is easing while the Bank of Canada holds its rate at 2.25%. The Fed has indicated more cuts are expected in 2026, especially since US GDP growth for the third quarter of 2025 was recently revised down to just 1.5%. This fundamental difference supports a stronger CAD as we head into the new year.

Derivative Traders Strategy

For derivative traders, this situation suggests that implied volatility on USD/CAD may decrease as the Fed’s plans become clearer. Traders should consider purchasing Canadian Dollar call options or US Dollar put options with expirations in the first quarter of 2026. This allows traders to take advantage of the expected decline in USD/CAD while managing their risk. Canada’s economic strength adds credibility to this outlook, especially after the positive jobs report from two weeks ago, which showed a steady unemployment rate of 5.5%. This contrasts sharply with the recent soft labor market data from the US. Canada’s strong performance gives the Bank of Canada room to maintain its position, which supports the CAD further. For those with a moderately bearish view, setting up bear put spreads on USD/CAD could be a cost-effective strategy. This method limits the upfront cost while still allowing profits from a decline towards the 1.3500-1.3600 range. This zone was a crucial support level during the volatile markets of late 2024. We will be closely monitoring tomorrow’s Canadian Retail Sales data for more signs of economic strength. A strong report would bolster the Bank of Canada’s cautious stance and likely increase the decline in USD/CAD. Traders should anticipate a possible surge in short-term volatility around this data release. Create your live VT Markets account and start trading now.

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