The Canadian Dollar (CAD) showed little movement against the US Dollar (USD) as markets awaited the year’s final Federal Reserve interest rate decision. Observers expect a third consecutive rate cut, focusing on changes to the Fed’s Summary of Economic Projections (SEP) and Fed Chair Jerome Powell’s communication as his term nears its end.
Trade Tensions And External Factors
External factors potentially affecting the Canadian Dollar include trade tensions with the Trump administration. US President Donald Trump announced $12 billion in extra agricultural support, reacting to disputes that have impacted US farmers. Tensions persist as Trump ponders tariffs on Canadian fertilizer, a critical product for US agriculture.
Recent Canadian Dollar movements saw it climb 2.3% after hitting lows in November but stabilised before the Fed’s rate decision. Markets are keenly observing potential changes to the Fed’s interest rate expectations for 2026. Technical indicators suggest any recent CAD strength might have waned for now.
Factors influencing the Canadian Dollar include Bank of Canada’s interest rates, oil prices as Canada’s largest export, and overall economic health indicators like GDP. These elements, coupled with the health of the US economy, play a vital role in the currency’s performance. Higher inflation typically leads to increased interest rates, attracting foreign investment and strengthening CAD. Macroeconomic data like GDP and employment figures also impact the Canadian Dollar’s value.
With the final Federal Reserve interest rate decision of 2025 happening tomorrow, we see the Canadian dollar stalled against the US dollar around 1.3850. A rate cut is already priced in, so our focus must be on Jerome Powell’s forward guidance for 2026. Any hint of a more aggressive cutting cycle could weaken the US dollar, while a “wait-and-see” tone could strengthen it.
Strategy For Trading Volatility
Given this uncertainty, we believe the best immediate strategy is to trade volatility itself. The market is tense, and any surprise from the Fed’s economic projections will cause a sharp move in USD/CAD. Buying at-the-money straddles or strangles with short-term expiries allows for a profitable outcome whether the pair breaks sharply higher or lower following the announcement.
Our underlying bias, however, is for Canadian dollar weakness in the coming weeks. The loonie’s recent 2.3% surge appears to have run its course, and technical indicators are showing it is overbought. The persistent trade threats from the US administration, particularly concerning fertilizer tariffs, add a layer of risk that isn’t going away.
This cautious outlook is reinforced by stubbornly low oil prices, with WTI crude struggling below $58.50 a barrel. This price is a significant drag for Canada, especially when we recall the healthier $75-$80 per barrel range seen through much of 2024. With energy products still accounting for over 20% of Canada’s total exports, according to Statistics Canada’s most recent data, weak oil directly translates to a weaker economic outlook and less support for the loonie.
Therefore, we are looking at positions that benefit from a rising USD/CAD, such as buying call options with January or February 2026 expiry dates. This allows us to profit from a potential grind higher while limiting our risk if the Fed’s announcement proves surprisingly negative for the US dollar. The high price of gold, now near $4,200, signals a broader market fear that often benefits the US dollar as a safe-haven currency, even during a rate-cutting cycle.
