The Canadian Dollar (CAD) is declining alongside other currencies as the US Dollar (USD) strengthens toward the week’s end. Despite these factors, downward pressure on the CAD remains limited due to a narrow front-end swap spread, anchoring it near fair value.
The USD/CAD pair is testing the top of the weekly range near 1.38, with a soft risk mood and crude prices presenting minor challenges for the CAD. The 2-year swap spread is around 75 basis points, the smallest since October 2024, providing stability. Shaun Osborne and Eric Theoret from Scotiabank suggest the spot fair value is approximately 1.3805.
Sectoral Tariff Agreement Prospects
PM Carney indicated that a sectoral tariff agreement is unlikely, and trade discussions may extend to a more comprehensive review of the USMCA next year. Although the USD is set to close the week with net gains, marking its first in a month, the strength might not continue into the next week. A movement above 1.38 could indicate potential for the USD to rise to the mid/upper 1.38 range, with support levels at 1.3760/70 and 1.3725/50.
We see USD/CAD pushing the 1.38 level, driven by broad US dollar strength and a cautious market mood. However, strong support for the Canadian dollar is coming from tightening interest rate spreads, which are the narrowest they’ve been since October of 2024. This suggests the pair may struggle to break out significantly higher in the immediate term.
Recent data supports this view, with WTI crude oil prices hovering near $75 a barrel, offering little tailwind for the loonie. Furthermore, the strong US non-farm payrolls report for November 2025, which showed a gain of 210,000 jobs, contrasts with Canada’s recent CPI print of 2.7%, keeping Bank of Canada rate hike expectations subdued. This fundamental divergence is capping the Canadian dollar’s potential.
For derivatives traders, the current environment suggests a range-bound market, with the spot price estimated to be fair around 1.3805. With the pair contained, we believe selling options to collect premium is a viable strategy for the holiday-thinned weeks ahead. An iron condor with strikes set outside the 1.3725 to 1.3875 range could capitalize on low near-term volatility.
Trade Agreement Review and Market Impacts
The main risk to this view is the upcoming broader review of the USMCA trade agreement next year, as noted by Prime Minister Carney. This uncertainty is likely to keep longer-dated implied volatility elevated compared to front-month options. This creates a potential opportunity for calendar spreads, selling short-term premium against a long position in longer-term volatility.
We remember how implied volatility in the pair spiked during the initial trade negotiations back in 2018, so this is a risk not to be taken lightly. That historical precedent suggests that while the current market is calm, it could shift rapidly on any new trade headlines. The current spread compression is helping anchor the currency for now, but the USMCA review looms as a significant event for early 2026.
