The Canadian Dollar (CAD) is showing some weakness due to ongoing trade concerns. This comes even though the market sentiment is generally positive and spreads are getting tighter. The USD/CAD exchange rate is currently around 1.40, but bearish signals have not fully materialized, with key support found at 1.3940. Reports indicate that President Trump might pull out of the USMCA next year, which has caused a slight drop in the CAD. While exiting the USMCA is complicated and requires congressional approval, it adds to the trade uncertainty for Canada and Mexico.

CAD Performance Issues

The CAD is slightly lagging behind, struggling to break through the 1.40 mark despite favorable conditions like a positive risk sentiment. Fair Value estimates have dropped to 1.3862. The CAD has not taken advantage of the US dollar’s bearish trends, as support for the USD is at 1.3940 and resistance is seen at 1.4010/20. FXStreet Insights Team reports that market experts are observing similar trends. Analysts suggest that the CAD is still having difficulty making gains, despite factors that should help it. The ongoing trade dispute over the Digital Services Tax keeps USD/CAD elevated around 1.3750, even with Canada’s inflation remaining steady. According to Statistics Canada’s latest report, the CPI for November 2025 is holding at 2.9%, which has led traders to reduce expectations for a Bank of Canada rate cut early next year. This scenario feels familiar, reminiscent of past trade uncertainties during the original USMCA negotiations. At that time, threats of a US withdrawal kept USD/CAD near 1.40, even when our models indicated a lower fair value. Many headlines were brushed off, but the underlying political risks held back the CAD from strengthening.

Traders Strategy Considerations

For traders, this could mean that the implied volatility in USD/CAD options is overpriced compared to the actual movements expected in the coming weeks. Selling premium through strategies like a short strangle or an iron condor might be beneficial. This way, traders can profit while the currency pair stays within a specific range, as political news creates noise without clear direction. One possible strategy is to set a range by selling the January 2026 1.3900 calls and the 1.3650 puts. This allows for collecting premium while waiting for more clarity in trade negotiations. The recent drop in WTI crude oil prices to $78 per barrel also limits the CAD’s momentum. However, it’s important to consider the risk of unexpected breakdowns in trade talks, similar to fears in the past. A wise strategy would be to purchase inexpensive, longer-dated out-of-the-money options. For example, buying March 2026 calls with a strike price above 1.41 could provide protection against significant and unexpected trade tensions. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now