USD/CAD remains weak, hovering near its lowest level since 22 October, primarily due to diverging Bank of Canada and US Federal Reserve policies. The Canadian Dollar is buoyed by rising Oil prices and a hawkish Bank of Canada, which suggests its rate-cutting cycle is over.
The Bank of Canada maintained its interest rate at 2.25%, citing positive third-quarter data supporting the economy despite trade tensions. This stable rate, along with speculation of future hikes, contrasts with the US Federal Reserve’s rate cut by 25 basis points, predicting another in 2026.
US Federal Reserve’s Market Impact
US Federal Reserve Chairman Jerome Powell indicated concerns over the labour market, hinting at possible future rate reductions. This, paired with a positive market tone, diminishes the US Dollar’s safe-haven appeal, affecting the USD/CAD exchange rate negatively.
The Canadian Dollar is influenced by several factors, including the Bank of Canada’s interest rate decisions, Oil prices, and key economic indicators like GDP and inflation. A strong Canadian economy propels the currency as it attracts foreign investment and possibly leads to higher interest rates by the Bank of Canada. Conversely, weak economic data could result in a weaker CAD.
With USD/CAD struggling below the 1.3800 mark, the path of least resistance appears to be downwards for the coming weeks. This weakness has been reinforced by last week’s data showing Canadian employment grew by a solid 35,000 jobs in November 2025, while the US Non-Farm Payrolls report came in below expectations. The bearish sentiment is creating a clear trend that we can’t ignore.
Monetary Policy Divergence
The core of this trend is the diverging monetary policies of the Bank of Canada (BoC) and the US Federal Reserve. We see the market is now pricing in over a 65% probability of a Fed rate cut in the first quarter of 2026, a significant shift from just a few months ago. In contrast, the BoC has signaled it is firmly on hold, a major policy difference that hasn’t been this pronounced since the aggressive hiking cycles of 2022 and 2023.
Adding to the pressure on the pair is the strength in oil prices, a key driver for the commodity-linked Canadian dollar. Following the most recent OPEC+ decision to extend production cuts, WTI crude has found solid footing above $80 a barrel, a level not consistently held since early 2025. This provides a strong underlying bid for the loonie.
For those trading derivatives, this outlook suggests selling out-of-the-money call options on USD/CAD with strike prices at 1.3850 or higher could be a prudent strategy to generate income. The pair has repeatedly failed to sustain any gains above that area, making those options likely to expire without value. Alternatively, buying put options could provide a direct way to profit from a potential move towards the October lows near 1.3700.
We must watch for any changes in broader market sentiment, as a sudden shift to risk-off trading could boost the US dollar’s safe-haven appeal. The upcoming trade balance figures from both countries could also introduce short-term volatility. A much stronger-than-expected US report could temporarily disrupt the bearish momentum.
