The Canadian Dollar has reached its highest level in five months against the US Dollar, with the USD/CAD pair hitting a 22-week low. The US Dollar has weakened as the holiday season approaches, helping other currencies like the Loonie to recover. The Bank of Canada (BoC) was surprised by the strength of the Canadian economy, despite ongoing trade tensions from the US administration. Canadian economic data has been stronger than expected, though there are still worries about future trade issues.

USMCA Trade Considerations

The USMCA agreement, implemented by President Trump, is set for a review in July 2026. While the agreement was once seen as successful, it now faces criticism and calls for fairer terms. The Canadian Dollar continued to rise, gaining 0.44% against the US Dollar, following a 0.34% increase the day before. The USD/CAD pair has fallen below 1.3700, entering an oversold condition. Key factors influencing the CAD include BoC interest rates, oil prices, and the overall health of the economy. The BoC’s policies, along with oil prices—Canada’s primary export—play a crucial role in the CAD’s performance. Additionally, inflation and economic indicators impact the CAD value, with strong economic results supporting its rise. As of December 24, 2025, the Canadian Dollar is at its strongest in five months against the US Dollar, with USD/CAD below 1.3700. This rise is mainly due to a general weakness in the Greenback, following lower-than-expected US inflation data for November, which was 2.8%. This has increased expectations that the Federal Reserve may cut interest rates in early 2026, as we enter a time of low holiday trading volume.

Economic Resilience and Market Dynamics

The Canadian economy has shown surprising resilience, as noted in the recent minutes from the Bank of Canada’s meetings. This strength is supported by the price of Western Canadian Select crude oil, which has stabilized above $70 a barrel, benefiting the Loonie. This is particularly impressive given the minor 0.3% GDP contraction reported in October 2025. The rapid decline in USD/CAD suggests it is now in oversold territory, making a short-term bounce or consolidation more likely. Caution is advised when pursuing this downward trend, as the chance of a rebound towards nearby resistance levels has increased. This situation suggests that options to protect against a rise in USD/CAD (calls) could be relatively inexpensive compared to puts. In the coming weeks, we can expect some profit-taking and a mean reversion that might push the pair higher, even while the general trend remains bearish. Given the typical low liquidity at year-end, any bounce could be sharp. A possible strategy is to sell out-of-the-money call spreads to collect premiums, betting that any potential rally will be limited. Looking ahead to early 2026, a significant challenge will be the six-year review of the USMCA trade agreement in July. President Trump has expressed growing dissatisfaction with the deal, which presents substantial political risk for the Canadian economy. While this may not impact the market immediately, it is a crucial element that could limit the Canadian Dollar’s gains in the first half of the new year. Create your live VT Markets account and start trading now.

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