The Canadian Dollar (CAD) exhibits mild weakness due to ongoing trade uncertainty, despite favourable risk sentiment and narrower spreads. The USD/CAD pair remains near 1.40 as bearish signals are incomplete, with key support at 1.3940.
Reports suggest President Trump may withdraw from USMCA next year, causing slight CAD decline. Although a USMCA exit is complex and requires congressional action, it maintains long-term trade uncertainty for Canada and Mexico.
CAD Performance Issues
The CAD slightly underperforms, struggling to breach 1.40 despite supportive factors like positive risk sentiment. Meanwhile, Fair Value estimates have dipped to 1.3862. The CAD has not capitalised on USD’s bearish trends, with USD support holding at 1.3940 and resistance at 1.4010/20.
FXStreet Insights Team reports market observations by experts, adding insights from internal and external analysts.
We are seeing a familiar pattern in the Canadian dollar, as it struggles to gain ground despite fundamentals that should be supportive. The ongoing trade dispute over the proposed Digital Services Tax is keeping USD/CAD elevated around 1.3750, even as Canada’s inflation remains persistent. Statistics Canada’s latest report showed November 2025 CPI holding at 2.9%, which has traders reducing bets on a Bank of Canada rate cut early next year.
This situation feels very similar to the trade uncertainty we saw years ago during the original USMCA negotiations. Back then, threats of a US withdrawal kept USD/CAD stuck near 1.40, even when our models suggested a fairer value was much lower. The market shrugged off many headlines, but the underlying political risk prevented the CAD from truly strengthening.
Traders Strategy Considerations
For traders, this suggests that implied volatility in USD/CAD options may be overpriced for the actual movement we are likely to see in the coming weeks. Selling premium through strategies like a short strangle or an iron condor could be advantageous. This approach benefits from the currency pair remaining within a defined range as political headlines cause noise but no real direction.
We would look at establishing a range by selling the January 2026 1.3900 calls and the 1.3650 puts. This allows us to collect premium while the market waits for more clarity on the trade front. The recent softening of WTI crude oil to $78 per barrel adds another reason for the CAD’s momentum to remain capped.
However, we must respect the risk of a sudden breakdown in trade talks, similar to the fears of the past. A prudent hedge would be to buy cheap, longer-dated out-of-the-money options. For instance, purchasing March 2026 calls with a strike price above 1.41 would offer protection against a significant and unexpected escalation in trade tensions.
