The Canadian Dollar (CAD) stayed mostly unchanged against the US Dollar (USD) as everyone waited for the last Federal Reserve interest rate decision of the year. Many expect the Fed to cut rates for the third time in a row. People are particularly eager to learn about any changes in the Fed’s Summary of Economic Projections (SEP) and how Fed Chair Jerome Powell communicates these updates as his term comes to an end.

Trade Tensions and External Factors

One thing affecting the Canadian Dollar is ongoing trade tensions with the Trump administration. Recently, President Donald Trump announced an additional $12 billion in agricultural support to help US farmers dealing with disputes. Tensions remain high as Trump considers tariffs on Canadian fertilizer, which is vital for US agriculture. The Canadian Dollar recently rose by 2.3% after reaching lows in November but has stabilized ahead of the Fed’s decision. Market watchers are paying close attention to possible changes in the Fed’s interest rate expectations for 2026. Technical indicators suggest that the recent strength of the CAD may be starting to fade. Several factors impact the Canadian Dollar, including the interest rates set by the Bank of Canada, oil prices (as oil is Canada’s top export), and general economic health indicators like GDP. The performance of the US economy also heavily influences the CAD. When inflation is high, interest rates usually increase, drawing foreign investment and strengthening the CAD. Macroeconomic data, such as GDP and employment figures, also affect the CAD’s value. With the final Federal Reserve interest rate decision of 2025 happening tomorrow, the Canadian Dollar stands at about 1.3850 against the US Dollar. A rate cut is anticipated, so the focus will be on Jerome Powell’s guidance for 2026. If he hints at a more aggressive cutting cycle, the US Dollar could weaken. Conversely, a “wait-and-see” stance might strengthen it.

Strategy for Trading Volatility

Given this uncertainty, our immediate recommendation is to trade on volatility. The market is nervous, and any surprises from the Fed’s economic projections could lead to significant shifts in USD/CAD. Buying at-the-money straddles or strangles with short-term expirations can be profitable, whether the exchange rate moves sharply up or down after the announcement. However, our general outlook leans toward Canadian Dollar weakness in the coming weeks. The recent 2.3% surge of the loonie seems to have run its course, and technical indicators are showing it may be overbought. Ongoing trade threats from the US, especially regarding fertilizer tariffs, add more risk to the situation. This cautious perspective is further supported by persistently low oil prices, with WTI crude struggling to stay above $58.50 a barrel. This is troubling for Canada, considering the healthier $75-$80 per barrel range seen for much of 2024. With energy products making up over 20% of Canada’s total exports, according to recent Statistics Canada data, low oil prices lead to a weaker economic outlook and less support for the loonie. Thus, we recommend positions that benefit from a rising USD/CAD, such as purchasing call options with expiry dates in January or February 2026. This strategy allows us to capitalize on a potential upward trend while limiting risk if the Fed’s announcement turns out to be unexpectedly negative for the US Dollar. The high price of gold, now near $4,200, indicates a broader market fear that often boosts the US Dollar as a safe-haven asset, even in a rate-cutting environment. Create your live VT Markets account and start trading now.

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