Canadian growth is projected to increase by 0.7% year-on-year, however, this is considered a retrospective measure. The Bank of Canada is anticipated to maintain its neutral position, with future rate adjustments potentially leaning towards a reduction.
The USD’s performance will remain a key factor affecting the CAD. A continued recovery in the USD may result in the USD/CAD moving towards 1.36-1.37. Short-term expectations for the USD/CAD are optimistic, with further gains in the USD being more probable.
Monetary Policy Divergence
We see a clear divergence opening up between the Bank of Canada’s policy and the Federal Reserve’s stance. While Canada’s upcoming growth figures are expected to confirm a modest 0.7% year-on-year increase, this is old news. The more important detail is that Canada’s latest CPI reading for December 2025 came in at a manageable 2.1%, giving our central bank a dovish tilt.
In contrast, the United States just posted a surprisingly strong jobs report for December, adding 210,000 jobs and keeping the Federal Reserve from signaling any imminent rate cuts. This is a big shift from the sentiment we saw in late 2025 when the market was pricing in a much more dovish Fed. The US Dollar Index (DXY) has already reflected this, climbing back towards the 104 level this month.
For traders, this points towards a bullish stance on USD/CAD in the short term. If this US dollar strength continues, we expect the pair to challenge the 1.3600 and even 1.3700 levels in the coming weeks. Options traders might consider buying calls on USD/CAD with March expiries to capitalize on this expected upward move.
Risk Considerations
We should remember how the USD rally fizzled out in the third quarter of 2025, so managing risk is still key. However, the current momentum is firmly with the US dollar. Ultimately, any Canadian data release in the near future will likely be overshadowed by the bigger story of US economic resilience.
