USD/CAD is trading near 1.3765, close to its recent lows, following the Bank of Canada’s decision to leave its policy rate unchanged at 2.25%. The Bank of Canada stressed a cautious outlook and the market anticipates a 25 basis point rate increase in the coming year.
The Bank of Canada maintained the policy rate at 2.25% as expected, suggesting that this rate level is appropriate to keep inflation around 2%. Despite uncertainties, the swaps curve suggests a 25 basis point rise to 2.50% within the next twelve months.
USD/CAD Forecast
The forecast anticipates USD/CAD will gradually decrease and stabilise between 1.3500 and 1.3600. The content is compiled by the FXStreet Insights Team, comprising journalists who gather market observations and insights from commercial and expert analysts.
With USD/CAD trading heavily near 1.3765, we see the Bank of Canada’s decision to hold its policy rate at 2.25% as a key factor. Their cautious tone is noted, but the market continues to price in a 25 basis point hike over the next year. This underlying expectation for a future rate increase should continue to provide support for the Canadian dollar.
Looking at the latest data from November 2025, we see that Canadian inflation remains persistent at 2.9%, which is still well above the central bank’s target. Paired with a surprisingly strong jobs report that saw the unemployment rate fall to 5.6%, the domestic economy appears robust enough to handle higher rates. This gives credibility to the market’s view that the BOC may have to act in the coming months, regardless of its current cautious stance.
Conversely, the situation in the United States shows signs of softening, with the most recent inflation figures from November 2025 dipping to 3.0%. The Federal Reserve is widely expected to be on an extended pause, and swaps markets are beginning to price in the possibility of rate cuts in the second half of 2026. This policy divergence, where Canada is on a tentative tightening path and the U.S. is leaning towards easing, is bearish for USD/CAD.
Impact of Policy Divergence and Oil Prices
We’ve seen this type of divergence play out before, such as during periods in 2023 when differing central bank outlooks created sustained trends in currency pairs. Furthermore, the price of Western Texas Intermediate (WTI) crude oil has been stable, holding above $85 per barrel, which typically acts as a tailwind for the commodity-linked Canadian currency. Given this backdrop, the path of least resistance for USD/CAD appears to be lower.
For derivative traders, this suggests positioning for a gradual decline in the pair toward the 1.3500-1.3600 range. Buying USD put options with strikes around 1.3650 or 1.3600 for January or February 2026 expiry could capture this expected move. The slow grind lower also makes strategies like selling out-of-the-money USD call spreads with strikes above 1.3850 an attractive way to collect premium, assuming volatility remains contained.
