The Canadian Dollar achieved its highest levels in five months against the US Dollar, with the USD/CAD pair reaching its lowest in 22 weeks. The US Dollar has softened across markets as the holiday season approaches, aiding in the recovery of other currencies, including the Loonie.
The Bank of Canada (BoC) was surprised by Canada’s economic resilience despite trade tensions from the US administration. Canadian economic data has been stronger than anticipated, yet concerns for future trade challenges persist.
USMCA Trade Considerations
Under the USMCA agreement initiated by President Trump, a review is scheduled for July 2026. The trade agreement, previously recognised as a success, faces criticism and calls for fairer terms.
The Canadian Dollar continued to rise, gaining 0.44% against the US Dollar, following a 0.34% increase the previous day. The USD/CAD pair has declined to below 1.3700, entering oversold territory.
Key influencers of CAD include BoC interest rates, Oil prices, and economic health. The BoC’s policy, in combination with Oil’s impact as Canada’s major export, affects CAD’s market behaviour. Inflation and macroeconomic indicators also play roles, with strong economic performance supporting CAD value.
As of today, December 24, 2025, we are seeing the Canadian Dollar at its strongest level in five months against the US Dollar, with USD/CAD below 1.3700. This is largely driven by a general weakness in the Greenback, as recent US inflation data for November came in softer than expected at 2.8%, increasing bets that the Federal Reserve will begin cutting interest rates in the first quarter of 2026. The move is happening as we head into a period of thin holiday trading.
Economic Resilience and Market Dynamics
On our side, the Canadian economy has shown surprising resilience, a view supported by the Bank of Canada’s recent meeting minutes. This strength is bolstered by the price of Western Canadian Select crude oil, which has stabilized above $70 a barrel, a positive driver for the Loonie. This economic persistence is notable, especially when we recall the data from a few months ago, like the minor 0.3% GDP contraction back in October 2025.
The speed of the recent drop in USD/CAD suggests the pair is in oversold territory, making a short-term pullback or consolidation more likely. We should be cautious about chasing this downward move, as the risk of a rebound toward nearby resistance levels has increased. This setup suggests that options protecting against a rise in the pair (USD/CAD calls) may be relatively cheap compared to puts.
For the next few weeks, we should anticipate potential profit-taking and a mean reversion that could push the pair higher, even if the broader trend remains downward. Given the thin market liquidity typical for the end of the year, any bounce could be sharp. A strategy to consider is selling out-of-the-money call spreads to collect premium, betting that any potential rally will be limited in scope.
Looking further into early 2026, the primary headwind is the upcoming six-year review of the USMCA trade agreement in July. President Trump has been increasingly vocal about his dissatisfaction with the deal, which introduces significant political risk for the Canadian economy. While this is not an immediate market driver today, it is a key factor that will likely cap the Canadian Dollar’s gains as we move through the first half of the new year.
