The Canadian Dollar (CAD) held steady against the US Dollar (USD) on Tuesday as the markets experienced a typical end-of-year lull. Recent minutes from the Federal Open Market Committee (FOMC) meeting showed that they are leaning towards a more cautious approach, indicating they may cut interest rates in the future if inflation slows. On Tuesday, the CAD made only minor movements against the USD. Although it appears to be overbought right now, the Canadian Dollar could see gains in 2026 as interest rates shift. The Bank of Canada has low interest rates, while the Federal Reserve is expected to lower rates. The FOMC minutes confirmed that policymakers are ready to cut rates if inflation trends warrant it.

Technical Analysis

The USD/CAD exchange rate is currently at 1.3697, which shows a bearish trend on the daily chart. The pair remains below the 50-day and 200-day exponential moving averages, with the Relative Strength Index (RSI) around 32, indicating weak momentum. Even with the possibility of short-term recoveries, strong sell signals will persist unless the moving averages are crossed. Key factors influencing the CAD include the Bank of Canada’s interest rates, oil prices, economic performance, inflation, and trade balance. Important economic data, like GDP and employment rates, directly affect the CAD. A strong economy can boost the currency by attracting foreign investment and encouraging potential interest rate hikes. As the markets quiet down for the final week of 2025, we see the Canadian Dollar as overbought, which might lead to a temporary decline against the US Dollar. Data from the Commodity Futures Trading Commission (CFTC) in mid-December showed that net long positions on the Canadian dollar were at their highest since early 2024. This suggests that positions are crowded and could see a short-term reversal as traders adjust.

Central Bank Policies

The key driver for early 2026 will be the difference in central bank policies, with the U.S. Federal Reserve expected to cut rates further. The latest U.S. Core PCE Price Index for November 2025 was 2.8%, which supports the Fed’s cautious approach and opens the door for rate cuts. Meanwhile, Canada’s inflation rate for November remained higher at 3.2%, leaving little incentive for the Bank of Canada to follow the Fed’s lead. This situation suggests that traders should consider using options to manage the short-term risks of a potential USD/CAD bounce while also positioning for longer-term strength in the CAD. A trader might look into buying short-dated call options on USD/CAD to benefit from a possible rise towards the 50-day moving average. A similar situation occurred in late 2021 when year-end market conditions briefly pushed USD/CAD up before the downward trend continued in the new year. We should also keep an eye on oil prices, which have been supporting the Loonie’s value. WTI crude prices have remained steady around $85 per barrel over the last quarter, and any increase would strengthen the case for a stronger CAD. This stable commodity backdrop suggests that any short-term weakness in the Canadian dollar could represent a good buying opportunity for the future. Create your live VT Markets account and start trading now.

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