The Canadian Dollar has stabilised against the US Dollar as 2025 comes to an end. Despite low year-end trading volumes, it holds firm after notable gains in late 2025. Market activities remain limited due to the holiday season.
Interest rate differences between Canada and the US continue to impact the Canadian Dollar. The Bank of Canada has limited options to adjust rates further after several cuts in 2024 and 2025. The US Federal Reserve is likely to face pressure to cut rates faster over the next two years, limiting gains for the US Dollar.
USD CAD Pair Trends
The USD/CAD pair is in oversold territory but remains on course for potential lows. It is trading below key moving averages, suggesting limited upside potential. Forecasts hint at a bearish extension toward the 1.3500 range.
Key factors driving the Canadian Dollar include interest rates, Oil prices, economic health, inflation, and trade balance. Decisions by the Bank of Canada heavily influence CAD, with higher rates generally benefiting it. Oil prices also play a crucial role, as they directly affect Canada’s trade balance. Economic indicators, such as GDP and employment figures, can impact CAD value.
With holiday trading volumes low, we should use this quiet period to position for Canadian dollar strength against the US dollar in the coming weeks. The primary driver is the diverging paths of the Bank of Canada (BoC) and the Federal Reserve (Fed). The Fed’s target rate sits at 4.50%, giving it significant room to cut, while the BoC is holding at 2.75% after its aggressive cutting cycle through 2024 and 2025.
We see little room for the Bank of Canada to move further, as its nine consecutive rate cuts have helped bring inflation back under control. The latest November 2025 CPI data showed inflation at 2.5%, comfortably inside the bank’s 1-3% target range. This stability suggests the BoC will remain on hold, keeping the Canadian dollar supported.
US Economy and Rate Cut Outlook
In contrast, the US economy is showing signs of slowing down, with Q3 2025 GDP growth coming in at a weaker-than-expected 0.8% annualized rate. This puts pressure on the Federal Reserve to begin cutting rates in 2026 to avoid a deeper slowdown. Markets are already pricing in at least two rate cuts from the Fed next year, which will likely cap any US dollar strength.
The loonie is also getting a boost from steady oil prices, a key Canadian export. West Texas Intermediate (WTI) crude has been holding firm around $85 a barrel, supported by OPEC+ decisions from earlier in the quarter to maintain production quotas. This stable energy revenue provides a solid fundamental backdrop for the Canadian currency.
While the deeply oversold USD/CAD pair might see a brief technical bounce, we see any rally toward the 1.3800 level as a good opportunity to establish short positions. Derivative traders could consider buying put options on USD/CAD or selling futures contracts. Our target for the first quarter of 2026 is a move down towards the 1.3500 support level.
