The USD/CAD pair bounced back after hitting a three-month low, rising from 1.3730 to 1.3770. The US Dollar stabilized even with mixed labor data that did not increase expectations for more Federal Reserve rate cuts. The US jobs report for November showed payroll growth of 64K, slightly above predictions, while October’s numbers were revised down significantly. The unemployment rate rose to 4.6%, the highest level since 2021, indicating a slowing labor market. Retail sales remained unchanged, pointing to decreased consumer demand.

Fed Leadership Considerations

Federal Reserve officials have mixed views on future monetary policy, with some expecting no more cuts next year. According to the Wall Street Journal, President Trump plans to interview Fed Governor Christopher Waller for a possible leadership role in the Fed. Economists view Waller favorably due to his consistent arguments for rate cuts. The Canadian Dollar may strengthen following the Bank of Canada’s decision to keep interest rates steady at 2.25%. Canadian inflation data showed a stable headline CPI of 2.2%, and trimmed-mean inflation fell to a ten-month low of 2.8%, close to the Bank of Canada’s target. Factors affecting the Canadian Dollar include Bank of Canada interest rates, oil prices, economic health, and market sentiment. As of December 17, 2025, the recent rise in USD/CAD above 1.3750 seems to be a short-term reversal in a generally weakening US economy. The US unemployment rate has increased from below 4% earlier this year to its current 4.6%, indicating a clear cooling trend. This recovery offers traders a chance to reassess their negative positions on the US dollar.

Market Divergences

A key conflict is evident between the Federal Reserve’s official forecast of one rate cut in 2026 and market expectations. According to the CME FedWatch Tool, futures markets currently indicate over a 70% chance of at least two rate cuts by the end of next year. The potential appointment of Christopher Waller as the new Fed Chair could push the Fed towards a more aggressive easing policy, which might pressure the dollar further. On the other hand, the Canadian dollar benefits from a stable Bank of Canada, which believes its current monetary policy is appropriate with inflation near its target. This stability is strengthened by WTI crude oil prices, which have remained around $85 per barrel this month following a turbulent autumn. This creates a clear policy divergence favoring the Canadian dollar over the US dollar in the medium term. For derivative traders, this suggests a strategy for a lower USD/CAD in the coming weeks. We should consider purchasing Canadian dollar call options or US dollar put options to take advantage of the anticipated decline. Given the uncertainty regarding Fed leadership, employing strategies like bearish put spreads can allow for profit from a downturn while clearly managing risk. Create your live VT Markets account and start trading now.

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