The Canadian Dollar (CAD) has made slight gains thanks to a weaker US Dollar (USD), improved investor confidence, and rising commodity prices. According to Scotiabank experts, the USD/CAD pair has broken a bear flag pattern, potentially heading toward the low-1.38s in the coming weeks. The CAD rose due to a softer USD, but its gains were modest compared to other major currencies. Investor sentiment is positive despite ongoing concerns. This is bolstered by stronger crude oil and copper prices, which are good for Canada’s trade situation.

Main Support for CAD

The main support for the CAD comes from narrowing interest rate spreads between the US and Canada. The two-year swap spread is now under 100 basis points. Experts expect a significant narrowing of the Federal Reserve (Fed) and Bank of Canada (BoC) policy spread soon, which could further reduce market-driven spreads. Recent losses in the CAD bring it closer to an estimated fair value of 1.3982. The USD has dipped below the bear flag level, revisiting lows around 1.3940. This could put more downward pressure on the USD, potentially moving toward 1.3875/85. After struggling to break above 1.4140 in November, a strong push through the upper 1.39 range could lead to gains in the low 1.38 area soon. The Canadian dollar is benefiting from a weaker US dollar and growing investor risk appetite. This is further supported by rising crude and copper prices, which are positive for Canada’s economy. Current trends suggest the USD/CAD pair could drop to the low-1.38s in the upcoming weeks.

Narrowing Interest Rate Spread

The main evidence for this view is the shrinking interest rate spread between the US and Canada. The two-year yield gap has decreased to below 100 basis points, down from over 115 bps just last month. We expect this gap to continue tightening as markets anticipate more aggressive rate cuts from the Federal Reserve compared to the Bank of Canada in 2026. Recent economic data supports this view and provides clearer signals for traders. The latest US jobs report showed a lower-than-expected increase of only 155,000 jobs, raising expectations for Fed easing. Meanwhile, Canada’s economy remains robust, with Statistics Canada reporting last week that Q3 GDP growth surpassed forecasts, giving the Bank of Canada reasons to maintain its current policy rate. For derivative traders, this environment suggests preparing for a further drop in USD/CAD. Consider buying CAD call options or USD put options that expire in late January or February 2026. Strike prices around 1.3850 or 1.3800 would allow traders to benefit from the anticipated decline in the spot currency. This price movement is similar to late 2023 when expectations of a Fed policy shift caused a significant drop in USD/CAD. After the pair couldn’t break above 1.4140 in November 2025, the decisive move below the 1.3975 level confirmed this bearish trend. The next key level to monitor is the 1.3875 area. Create your live VT Markets account and start trading now.

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