USD/CAD reached a five-month low of 1.3675 on Wednesday, as the US Dollar weakened due to expectations of two Federal Reserve rate cuts in 2026. Canada’s economy showed signs of recovery, growing 0.1% in November after a 0.3% contraction in October.
The decline in USD/CAD continued for a third consecutive session, with the pair facing pressure during Asian trading hours. Dovish sentiment was further fuelled by calls for lower borrowing costs, despite rapid US economic growth in the third quarter.
Federal Reserve Interest Rate Overview
White House comments suggested the Federal Reserve is not reducing interest rates quickly enough. Preliminary US GDP data showed a 4.3% growth in the third quarter, surpassing expectations of 3.3%.
US core PCE Price Index rose by 2.9%, while the GDP Price Index increased by 3.7%, exceeding forecasts. Analysts caution that strong GDP figures may not reflect economic health, as growth was largely driven by healthcare spending and inventory reductions.
Canada’s GDP estimate showed a modest 0.1% increase for November, reducing growth concerns. The Bank of Canada maintained the overnight rate at 2.25%, signalling a pause rather than further cuts, supporting the Canadian Dollar.
With USD/CAD breaking below the key 1.3700 level, we see the trend favoring a stronger Canadian dollar into early 2026. The market is increasingly pricing in a policy divergence, with the Federal Reserve expected to cut rates while the Bank of Canada holds steady. This environment suggests that selling any rallies in the US dollar will likely be the prevailing strategy.
Outlook for USD/CAD and Trading Strategies
We believe the market is correctly looking past the strong US Q3 GDP figure and focusing on forward-looking weakness. The cooling we saw in the US labor market, with job openings falling below 9 million for the first time in over a year back in late 2025, supports the view that the Fed will have room to ease policy. This narrative is strong enough to overshadow the headline growth numbers, which were driven by less sustainable factors.
On the other hand, the Canadian economy is showing resilience, avoiding a technical recession with its modest November growth. Paired with oil prices, specifically Western Texas Intermediate, which has held a firm floor above $75 a barrel through the fourth quarter, the fundamental backdrop for the Canadian dollar appears solid. The Bank of Canada’s current rate of 2.25% now looks relatively attractive.
For derivative traders, this outlook makes buying USD/CAD put options an attractive strategy to position for further downside. We would look at expirations in the first quarter of 2026, targeting strikes around the 1.3550 level. This approach offers a defined-risk way to profit if the US dollar continues its decline against the Canadian dollar.
Given the thin holiday trading volume, we should be cautious of sharp, unexpected price swings. A more conservative strategy would be to implement a bear put spread, which involves buying a higher-strike put and selling a lower-strike one. This limits the initial cost and potential profit but protects against a sudden reversal in the quiet market conditions.
Looking ahead, we must closely monitor the next US employment and inflation reports in January. If those figures confirm a continued slowdown in the US economy, it will solidify bets for Fed rate cuts and likely push USD/CAD even lower. Any sign of persistent inflation in Canada would further support our view.
