The US Dollar recovers slightly against the Canadian Dollar, with USD/CAD moving toward 1.3700, increasing by around 0.20% on Monday. This follows a period where the pair traded near a five-month low at 1.3640, with demand for the US Dollar appearing modest as the week starts amidst lower liquidity.
Support for the Canadian Dollar from previously higher Oil prices is waning. West Texas Intermediate (WTI) Oil is recovering after recent losses, influenced by ongoing geopolitical issues in the Middle East. However, the Canadian Dollar struggles to maintain gains due to these fading support dynamics.
Dollar Stability Amid Rate Cuts
The US Dollar stabilises despite broader pressure, with markets anticipating future Federal Reserve rate cuts by 2026. A 25-basis-point cut was implemented at December’s meeting, dropping the target range to 3.50%-3.75%. Over 2025, a cumulative 75 basis points in cuts were introduced amid a cooling labour market and inflation above target.
Attention shifts to the forthcoming Federal Open Market Committee (FOMC) Minutes, anticipated to shed light on policy discussions and future outlooks. In the context of Canadian monetary policy, the Bank of Canada (BoC) maintains a cautious approach, as inflation slightly exceeds the 2% target. The contrasting policy directions help keep USD/CAD in a consolidation pattern.
With USD/CAD bouncing off its recent lows near 1.3640, we see this as a short-term correction driven by thin holiday trading. This move toward 1.3700 is happening on low volume, which often signals a lack of strong conviction behind the price action. Traders should be cautious about chasing this rally, as the broader trend may not have shifted.
The bigger picture for the US Dollar is still shaped by the Federal Reserve’s actions throughout 2025. We’ve seen 75 basis points in rate cuts this year, a direct response to a cooling economy, as evidenced by the November Non-Farm Payrolls report showing job growth slowing to 155,000. However, with the latest CPI inflation data for November still firm at 2.8%, the Fed is not in a rush, which creates this near-term stability for the dollar.
Oil Prices and Canadian Dollar Impact
For the Canadian Dollar, the fading support from oil prices is a key factor this week. West Texas Intermediate crude is struggling to stay above $82 a barrel after last week’s government data showed a smaller-than-expected draw in US stockpiles, raising concerns about demand. This, combined with Canadian inflation that remains sticky at 2.9% as of November, gives the Bank of Canada little reason to change its cautious stance.
Given this backdrop, we should consider using options to navigate the next few weeks. A trader could use this current strength in USD/CAD to buy bearish positions, like put options with February 2026 expiry dates, positioning for a return to the downtrend once fuller market participation resumes. This strategy allows us to bet on a weaker US dollar in the new year while limiting our upfront risk.
The upcoming FOMC minutes will be the first major catalyst for early 2026. We will be looking for any debate among policymakers that hints at the pace of future rate cuts. A failure for USD/CAD to firmly break and hold above the 1.3720 resistance level in the coming days could signal that this current rebound is weak and that sellers are waiting to re-engage.
