Insights 
VT 
The Canadian Dollar advanced slightly due to a weaker US Dollar, improved risk sentiment, and stronger commodity prices. The USD/CAD broke a bear flag, potentially moving towards the low-1.38s in the coming weeks, according to Scotiabank’s experts.
The CAD gained some ground thanks to a softer USD, although the gain was modest compared to other major currencies. Positive risk appetite is noted despite underlying concerns, supported by firmer crude and rising copper prices, which may boost Canadian trade terms favourably.
Main Support for CAD
Main support for the CAD stems from narrowing US/Canada spreads, with the two-year swap differential below 100 basis points. Expectations are for a notable narrowing of the Fed/BoC policy spread in the future, leading to a continued reduction in market-driven spreads. Spot losses bring the CAD closer to an estimated fair value of 1.3982.
The USD fell below the bear flag base, revisiting lows around 1.3940. This break may exert further downward pressure on the USD towards 1.3875/85. Following rejections at 1.4140 in November, the CAD’s decisive movement through the upper 1.39 zone could lead to gains in the low 1.38 area soon.
We are seeing the Canadian dollar take advantage of a softer US dollar and an improved appetite for risk among investors. This move is supported by firmer crude oil and copper prices, which are beneficial for Canada’s economy. The current momentum could see the USD/CAD pair drift lower into the low-1.38s over the coming weeks.
Narrowing Interest Rate Spread
The primary support for this view comes from the narrowing interest rate spread between the US and Canada. The 2-year yield differential has tightened to below 100 basis points, down from over 115 bps just last month in November 2025. We anticipate this gap will continue to shrink as markets price in more aggressive rate cuts from the U.S. Federal Reserve in 2026 compared to the Bank of Canada.
Recent economic data reinforces this trend, giving traders a clearer signal. The latest U.S. jobs report showed a softer-than-expected gain of only 155,000 jobs, fueling expectations of Fed easing. In contrast, Canada’s economy has shown resilience, with Statistics Canada reporting last week that Q3 2025 GDP growth beat forecasts, giving the Bank of Canada reason to hold its policy rate steady for now.
For derivative traders, this environment suggests positioning for further USD/CAD downside. One could consider buying CAD call options or USD put options expiring in late January or February 2026. Strike prices around 1.3850 or 1.3800 would be a direct way to capitalize on the expected move lower in the spot currency pair.
This price action is reminiscent of what we observed in late 2023, when expectations of a Fed policy pivot caused a sharp drop in USD/CAD. After the pair failed to break above 1.4140 in November 2025, its decisive move below the 1.3975 level has confirmed this bearish momentum. The next key technical target to watch is the 1.3875 area.
