The Canadian Dollar (CAD) is falling as the US Dollar (USD) rises towards the end of the week. However, the CAD is not under too much pressure because a narrow swap spread keeps it close to fair value. The USD/CAD exchange rate is approaching 1.38, facing some challenges from a cautious market and crude oil prices. The 2-year swap spread is about 75 basis points, the lowest since October 2024, which helps maintain stability. Shaun Osborne and Eric Theoret from Scotiabank believe the fair value for this exchange rate is around 1.3805.

Sectoral Tariff Agreement Prospects

Prime Minister Carney stated that a sectoral tariff agreement is unlikely. Trade talks may lead to a more thorough review of the USMCA next year. Even though the USD is on track for net gains this week—its first increase in a month—this strength may not continue next week. If the USD crosses above 1.38, it could rise further into the mid to upper 1.38 range, with supporting levels at 1.3760/70 and 1.3725/50. We expect USD/CAD to test the 1.38 level, driven by a strong US dollar and a cautious market. However, the CAD is supported by tightening interest rate spreads, which are the smallest since October 2024. This means the exchange rate might not rise significantly in the short term. Recent data backs this up, as WTI crude oil prices remain around $75 a barrel, which doesn’t help the loonie. Additionally, the strong US non-farm payrolls report for November 2025, showing a gain of 210,000 jobs, contrasts with Canada’s recent CPI of 2.7%. This divergence is keeping expectations for a Bank of Canada rate hike low, limiting the Canadian dollar’s potential. For traders in derivatives, the current conditions suggest a range-bound market, with a fair spot price around 1.3805. Since the exchange rate is stable, selling options for premium collection is a smart strategy for the less active holiday weeks ahead. An iron condor with strike prices outside the 1.3725 to 1.3875 range could take advantage of low near-term volatility.

Trade Agreement Review and Market Impacts

The main risk to this outlook is the expected review of the USMCA trade agreement next year, as mentioned by Prime Minister Carney. This uncertainty might keep longer-term volatility higher compared to options with shorter terms. This creates an opportunity for calendar spreads, where traders can sell short-term options while holding longer-term positions. We recall how implied volatility spiked during the initial trade negotiations back in 2018, so this risk shouldn’t be underestimated. Historical data shows that even if the current market seems calm, it could change quickly with any new trade news. The current spread compression is helping keep the currency stable for now, but the USMCA review is a major event to watch for early 2026. Create your live VT Markets account and start trading now.

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