Insights 
VT 
The USD/CAD pair has been declining for four consecutive days due to the stronger Canadian Dollar following Canada’s Q3 GDP rebound. The pair is trading around 1.3984, as USD weakness persists.
In Q3, Canada’s economy grew with real GDP increasing 0.6%, and the annualised growth rate jumping to 2.6%, exceeding expectations. This rebound was primarily driven by trade, with exports up 0.2% and imports down 2.2%.
Monetary Policy and Interest Rates
The Bank of Canada (BoC) is expected to maintain its interest rate at the December meeting, following its October rate cut to 2.25%. Meanwhile, the Federal Reserve is seen considering a rate cut next month, with an 85% probability of a 25 bps cut.
The BoC manages monetary policy to maintain price stability, raising interest rates to strengthen CAD or deploying tools like quantitative easing to weaken it. Quantitative tightening, in contrast, boosts CAD as the BoC ceases asset purchases.
Overall, the differing policies between the BoC and the Federal Reserve are likely to keep the USD under pressure, sustaining a bearish outlook for USD/CAD.
Divergence in Central Bank Policy
The divergence in central bank policy is becoming the primary driver for the USD/CAD pair. We are seeing Canada’s economy show unexpected strength with its 2.6% annualized Q3 growth, giving the Bank of Canada room to hold interest rates steady. This contrasts sharply with the United States, where weakening data is pushing the Federal Reserve toward a rate cut.
Recent data from this past week supports this outlook. The latest US Core PCE Price Index, the Fed’s preferred inflation gauge, came in slightly below target at an annualized 2.1%, while initial jobless claims ticked up to their highest level in three months. This adds credibility to the market’s pricing of an 85% chance for a Fed rate cut at the December 10th meeting.
For derivative traders, this outlook suggests strategies that profit from a falling or capped USD/CAD. Selling call options or implementing bear call spreads above the 1.4050 level could be an effective way to generate income, capitalizing on the view that any upward moves will be limited. For those with a stronger bearish conviction, buying put options provides direct exposure to further downside.
Looking back, we saw a similar dynamic play out during the 2017-2018 period. At that time, the Bank of Canada began a hiking cycle ahead of the Fed, causing a sustained drop in the USD/CAD exchange rate. History suggests that when these policy paths diverge, the trend can have significant momentum.
However, we must also consider the underlying details of Canada’s recent GDP report. The growth was primarily fueled by a drop in imports rather than strong domestic demand, which actually weakened. If Canadian consumer spending continues to falter into the new year, it could eventually force the Bank of Canada to reconsider its neutral stance.
