USD/CAD holds below 1.3800 as expectations rise for US Federal Reserve rate cuts spurred by softer November CPI data. The currency pair trades around 1.3780 during Asian hours, affected by the US Dollar’s struggles. November’s US Consumer Price Index eased to 2.7%, below the anticipated 3.1%, with core CPI at 2.6%, the slowest pace since 2021.
US President Trump indicates that the next Federal Reserve Chair will lean towards lower interest rates. Meanwhile, Canada’s Retail Sales data remains flat at 0% in October. The Bank of Canada has kept interest rates at 2.25%, noting inflation near target levels.
Factors Influencing the Canadian Dollar
The Canadian Dollar is influenced by interest rates set by the Bank of Canada, oil prices, economic health, inflation, and the Trade Balance. Decisions by the Bank of Canada, such as interest rate adjustments, play a crucial role in the Canadian Dollar’s value. The price of oil impacts the CAD since it is a major export for Canada, affecting the trade balance.
Inflation data influences the CAD as central banks might adjust interest rates in response. Economic data such as GDP and employment figures also impact the currency’s strength, attracting foreign investments if positive.
We’re seeing growing bets on Federal Reserve rate cuts, especially after the November CPI came in softer than expected at 2.7%. The CME FedWatch Tool now shows an over 85% probability of a 25-basis-point cut by the March 2026 meeting. This environment suggests positioning for a weaker US dollar against the Canadian dollar in the coming weeks.
Given this outlook, we believe derivative traders should consider strategies that benefit from a declining USD/CAD exchange rate. Buying put options or establishing bearish put spreads for the first quarter of 2026 could be effective ways to capitalize on this trend. We’ve observed one-month risk reversals for USD/CAD turning negative, indicating that the premium for puts is now higher than for calls, confirming this bearish sentiment.
Policy Divergence and Market Implications
The policy divergence between a dovish Fed and a steady Bank of Canada, which held its rate at 2.25%, supports a stronger loonie. A recent recovery in WTI crude prices to over $85 a barrel, driven by OPEC+ production discipline, adds another layer of support for the Canadian dollar. This contrasts sharply with the situation back in late 2024 when oil price weakness weighed on the currency.
We must remain watchful of Canada’s upcoming October retail sales data, as a flat reading could temporarily cap the loonie’s strength. Similarly, any unexpectedly strong US data, like today’s University of Michigan sentiment index, might cause a short-term rebound in the US dollar. We remember how sticky inflation proved to be back in 2023, so any signs of resilient US consumer demand could slightly postpone those rate cut expectations.
