The USD/CAD is currently at a five-month low as holiday trading has reduced market activity. The Canadian Dollar is benefiting from differences in monetary policy between the Bank of Canada (BoC) and the Federal Reserve (Fed), with the BoC expected to maintain its rates until 2026. Even though the US Dollar (USD) is strong, the Canadian Dollar (CAD) has seen modest gains. Right now, USD/CAD is around 1.3675, its lowest level since July.

Canadian and US Economies

On Tuesday, Canada’s GDP data showed a 0.3% contraction in October, which matched expectations. In contrast, the US economy’s preliminary GDP growth for the third quarter was 4.3%, exceeding forecasts. The BoC has decided to keep its policy rate at 2.25%, signaling an end to its easing cycle, while the Fed is expected to ease slowly. Markets predict that the BoC will hold its rates steady until 2026, but the timing of future rate cuts from the Fed remains unclear. Several factors are influencing the CAD, such as the BoC’s interest rates, oil prices, economic health, inflation, and trade balance. Generally, high oil prices and positive economic data boost the CAD by attracting foreign investment. Increased inflation might lead to higher interest rates, which would benefit the CAD. A strong economy can draw foreign investors and strengthen the Canadian Dollar. With USD/CAD testing its five-month low near 1.3675, the main factor at play is the widening gap between the BoC and the Fed’s policies. Current holiday-thinned markets keep volatility low, but this might be a good time to prepare for early 2026. We expect the BoC to maintain firm rates while the Fed looks to cut.

Canadian Dollar and Energy Markets

The ongoing divergence in policies is supported by recent data worth monitoring. November’s Canadian inflation report showed a stubborn 2.9% year-over-year increase, giving the BoC good reason to keep its 2.25% policy rate. Meanwhile, markets are predicting over a 65% chance of a Fed rate cut by their March 2026 meeting, according to the CME FedWatch tool. The Canadian dollar is also benefiting significantly from energy markets. WTI crude oil prices have risen above $82 per barrel due to higher winter demand forecasts and sustained OPEC+ supply discipline. Since oil is Canada’s largest export, this price strength provides a solid underpinning for the loonie. For traders in derivatives, the low implied volatility during this quiet holiday season presents an opportunity to buy options at a lower cost. Buying Canadian dollar call options or US dollar put options expiring in late Q1 2026 could be a smart way to take advantage of this trend. These positions would profit if the CAD remains weak when trading volume returns in January. However, we need to keep potential risks in mind. Recent data shows that the Canadian economy contracted in October 2025, while US Q3 GDP was a strong 4.3%, indicating a more robust US economy. Additionally, speculative positioning data suggests that long Canadian dollar trades are becoming crowded, which could result in a sharp reversal if sentiment changes. Create your live VT Markets account and start trading now.

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