The Canadian Dollar (CAD) is currently the weakest currency in the G10 due to challenges arising from US risks and interventionism. Commerzbank’s report by Michael Pfister projects these challenges to continue throughout the year, with only a slow decline in the USD/CAD exchange rate.
The CAD is anticipated to remain affected by US developments, necessitating a raised risk premium. Recovery for the CAD is expected to be sluggish unless a comprehensive deal with the US or a finalized USMCA agreement revision is reached.
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The article also mentions other updates, such as the AUD/JPY stabilising near 106.00 and Australia’s CPI expected to rise 3.6% year over year. Also covered are trends like EUR/USD hitting multi-month highs, and silver price forecasts. Additionally, information on the best brokers in various regions and categories for 2026 is provided.
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The Canadian dollar is facing headwinds from renewed US trade risks, and we see this instability persisting for the foreseeable future. This situation justifies a risk premium on the currency, which is already the weakest performer in the G10 this month. Traders should anticipate this theme to dictate market action in the coming weeks.
The Impact Of USMCA Review
The scheduled 2026 review of the USMCA trade agreement is the primary source of this uncertainty, especially with bilateral trade exceeding $850 billion in 2025. We remember how political commentary from the White House caused sharp swings in the loonie throughout last year. This suggests that holding some protection, such as longer-dated USD/CAD call options, could be a prudent hedge against sudden political escalations.
The options market is already pricing in this tension, with implied volatility on three-month USD/CAD options ticking up to 8.2% from last month’s lows. This elevated volatility makes selling premium through strategies like iron condors potentially attractive for those who expect the pair to remain choppy but range-bound. However, any definitive breakdown in trade talks could trigger a significant breakout.
The key insight is not just about USD/CAD, but about the Canadian dollar’s broad weakness. The Bank of Canada’s cautious stance on interest rates, especially after the more hawkish signals we saw from the European Central Bank last week, suggests pairs like EUR/CAD have more room to climb. Using futures or call option spreads on these cross-currency pairs could be a more direct way to trade this divergence.
Given the forecast is for a slow grind rather than a sharp drop in USD/CAD, buying outright put options may be costly due to the higher volatility. A bear put spread could be a more effective strategy to express a modestly bearish view while defining risk and lowering the initial cost. This aligns with the expectation of a gradual move, not a sudden collapse in the pair.
