The Canadian Dollar (CAD) remained steady against the US Dollar (USD) on Tuesday as markets navigated the end-of-year lull. The Federal Open Market Committee’s (FOMC) recent meeting minutes indicated a predominance towards a dovish stance, with openness to future interest rate cuts if inflation moderates.
On Tuesday, the CAD experienced limited movement against the USD. While currently overbought, the Canadian Dollar could see gains in 2026 as rate differences change. The Bank of Canada finds itself with low interest rates, while the Federal Reserve anticipates rate cuts. The FOMC minutes reaffirm policymakers’ willingness to reduce rates if warranted by inflation trends.
Technical Analysis
For USD/CAD, trading at 1.3697 shows a bearish trend on the daily chart. The pair remains below both the 50-day and 200-day exponential moving averages, with the RSI near 32, suggesting weak momentum. Despite potential short-term recoveries, strong sell signals persist unless moving averages are surpassed.
Key drivers for the CAD include the Bank of Canada’s interest rates, Oil prices, economic health, inflation, and trade balance. Macroeconomic data such as GDP and employment directly impact the CAD, with a healthy economy benefiting the currency by attracting foreign investment and prompting potential rate increases.
With markets quiet for the final week of 2025, we see the Canadian dollar as overbought, which could lead to a brief dip in its value against the US dollar. Looking back, CFTC data from mid-December showed that speculative net long positions on the Canadian dollar were at their highest level since early 2024. This suggests a crowded trade that is vulnerable to a short-term reversal as positions are squared up.
Central Bank Policies
The main driver for early 2026 will be the difference in central bank policy, with the U.S. Federal Reserve looking to cut rates further. The latest U.S. Core PCE Price Index from November 2025 came in at 2.8%, supporting the Fed’s dovish stance and opening the door for cuts. Meanwhile, Canada’s own inflation reading for November remained stickier at 3.2%, giving the Bank of Canada little reason to follow the Fed’s lead.
This setup suggests using options to manage the short-term risk of a USD/CAD bounce while positioning for longer-term CAD strength. A trader could consider buying short-dated call options on USD/CAD to profit from a potential pop towards the 50-day moving average. We saw a similar pattern in late 2021, when year-end thin liquidity led to a brief spike in USD/CAD before the broader downtrend resumed in the new year.
We must also watch the price of oil, which has been providing a solid floor for the Loonie’s value. WTI crude prices have held firm around $85 per barrel for most of this last quarter, and any further strength would support the case for a stronger CAD. This stable commodity backdrop reinforces the view that any near-term weakness in the Canadian dollar is likely a buying opportunity for the longer run.
