The USD/CAD pair saw a modest rebound as the US Dollar regained stability following losses due to weaker-than-expected US inflation data. The Consumer Price Index in the US rose 2.7% year-on-year in November, which was below the expected 3.1% and marked a decrease from 3.0% in September; the Core CPI also slowed to 2.6%.
This softer inflation data bolstered the view that the Federal Reserve might implement rate cuts by 2026, with markets anticipating two rate cuts next year. Currently, the monetary policy outlook suggests a preference for the Canadian Dollar, as the Federal Reserve adopts a gradual easing approach while the Bank of Canada maintains its interest rates at 2.25%, reflecting stable inflation and resilient economic activity.
Upcoming Economic Data Releases
Attention now turns to upcoming economic data releases in Canada and the US, notably Canadian Retail Sales and US Existing Home Sales. The University of Michigan will also publish Consumer Sentiment and Consumer Expectations indices, alongside one-year and five-year inflation expectations surveys, providing further insights into economic conditions. Overall, the Canadian Dollar showed the strongest performance against the Euro in today’s currency movements.
The softer US inflation print of 2.7% confirms the disinflationary trend we have watched unfold over the past two years, moving far from the peaks above 8% seen back in 2022. This should encourage us to position for further US Dollar weakness against the Canadian Dollar. We see the pair’s rebound to 1.3770 as a temporary stabilization before the next move lower.
The key takeaway is the growing policy divergence, with the Federal Reserve on an easing path while the Bank of Canada holds its rate at 2.25%. The Fed has signaled more cuts are likely in 2026, a logical step given that US GDP growth for the third quarter of 2025 was recently revised down to just 1.5%. This fundamental difference supports a stronger CAD into the new year.
Derivative Traders Strategy
For derivative traders, this environment suggests implied volatility on USD/CAD may cheapen as the Fed’s path becomes more predictable. We think traders should look at buying Canadian Dollar call options or US Dollar put options expiring in the first quarter of 2026. This allows for participation in the expected downside move in USD/CAD while clearly defining risk.
Canada’s economic resilience gives this view more credibility, especially after the strong jobs report from two weeks ago which showed the unemployment rate holding steady at a healthy 5.5%. This contrasts sharply with the softening labor market data we have seen from the US over the past quarter. This strength gives the Bank of Canada room to remain on hold, further supporting the CAD.
For those with a moderately bearish outlook, establishing bear put spreads on USD/CAD could be a cost-effective strategy. This approach limits the upfront premium cost while still profiting from a decline toward the 1.3500-1.3600 range. That range was a key support area we observed during the more volatile markets of late 2024.
We will be closely watching tomorrow’s Canadian Retail Sales figures for further signs of domestic economic strength. A strong print would reinforce the Bank of Canada’s hawkish hold and likely accelerate the downward trajectory for USD/CAD. Traders should be prepared for a potential spike in short-term volatility around that release.
