USD/CAD has fallen to almost six-month lows due to ongoing weakness of the US Dollar. Traders are being cautious as they await interest rate decisions from the Federal Reserve and the Bank of Canada, with a focus on their upcoming meetings this Wednesday. The Canadian Dollar is strengthening against the US Dollar and is currently trading around 1.3637. The decline of the Greenback is complicated by potential tariffs from Washington, as President Trump has threatened a 100% tariff on Canadian goods following trade talks with China.

Overview of Trade Tensions

Canadian Prime Minister Mark Carney has downplayed Trump’s tariff threats as part of a strategy. He believes these remarks are linked to preparations for the upcoming USMCA review. Carney highlighted that Canada is only making minor tariff reductions related to its dealings with China. The US Dollar faces pressure from Trump’s trade policies, worries about the Federal Reserve’s independence, and fears of a government shutdown. Currently, the US Dollar Index is at a near four-month low of 96.61. Recent data shows that the average ADP Employment Change is slightly below expectations, while the Housing Price Index has exceeded forecasts. As the Fed and BoC are likely to keep interest rates steady, all eyes are on their statements for future policy direction. The markets expect gradual easing from the Fed and will be looking for hints of any potential rate hikes from the BoC. Looking back to 2025, the USD/CAD tested six-month lows around 1.3637 because of widespread US Dollar weakness. However, the situation has changed, with the pair now trading close to 1.3950. The US Dollar Index has risen from the 96.61 level to approximately 103.50, indicating a shift in market dynamics away from last year’s steady dollar selling.

Impact of Policy Divergence

In the second half of 2025, the Federal Reserve cut rates three times, more than the two cuts that markets expected. This was in response to US inflation dropping to 2.8% by year-end. Meanwhile, the Bank of Canada has held its rates steady due to persistent domestic inflation, which reached 3.1% last quarter, preventing any interest rate decreases. This difference in policy is a major reason for the Canadian Dollar’s recent underperformance against the US Dollar. We remember the tariff threats during last year’s USMCA review, which did not escalate after the review concluded in November 2025. Although that specific risk has diminished, ongoing trade tensions still create some volatility for the Canadian Dollar. The focus has shifted from direct threats to more subtle negotiations over trade balances. Given last year’s significant rally, taking short positions on USD/CAD might be premature. Traders should consider using options to manage risk. For instance, buying put spreads could allow traders to bet on a moderate pullback toward the 1.3800 level without exposing themselves to unlimited risk. This strategy enables them to take advantage of potential downturns while setting a limit on their maximum loss. In the coming weeks, we will closely monitor employment data from both countries. Any signs of divergence could drive the next trend. Changes in tone from the central banks will also be critical, especially as the markets currently expect a 40% chance of a Bank of Canada rate cut by summer. A hawkish surprise from the central bank could lead to a sharp decline in the pair. Create your live VT Markets account and start trading now.

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