The USD/CAD pair hovers near its 11-week low, around 1.3800, during the Asian session on Monday. A downturn on Friday followed the Canadian job report for November, which showed unemployment dropping to 6.5% from 6.9% in October, driven by a rise in part-time jobs.
Though full-time jobs grew by 53.6K, down from 66.6K in October, they surpassed the anticipated loss of 5K jobs. This robust data dampened expectations of an interest rate cut by the Bank of Canada (BoC), with a decision expected on Wednesday to maintain rates at 2.25%.
Trade Relations Uncertainty
Uncertainty over US-Canada trade relations remains a hurdle for the Canadian Dollar. US President Trump labeled the recent talks “very productive” but offered no specifics on resuming discussions with Canada.
Meanwhile, the US Dollar moves cautiously with the Federal Reserve’s policy announcement imminent. The Fed is expected to lower interest rates by 25 basis points to a range of 3.50%-3.75% amidst worsening US labour market conditions.
The BoC’s upcoming interest rate decision follows its eight annual meetings. Its stance on inflation influences whether it will adjust rates, impacting foreign capital flow into Canada. The next release is scheduled for 10 December 2025, with market expectations for a rate of 2.25%.
Monetary Policy Announcements
Given the recent strength in Canadian labor figures, we see the USD/CAD pair as vulnerable to further declines. The drop in Canada’s unemployment rate to 6.5% contrasts sharply with recent data from the United States, where the November jobs report showed a disappointing gain of only 85,000 positions and a rise in unemployment to 4.2%. This economic divergence is the central theme for trading in the coming weeks.
The main event this week will be the monetary policy announcements from both central banks on Wednesday, December 10. We expect the Bank of Canada to hold its rate steady at 2.25%, while markets are pricing in a 92% probability of the Federal Reserve cutting its rate by 25 basis points. This widening interest rate differential should put significant downward pressure on the USD/CAD exchange rate.
For traders, buying USD/CAD put options with expirations in late December or January seems like a prudent strategy. This allows for participation in a potential downward move following the central bank meetings while strictly defining risk to the premium paid. We would look at strike prices below the 1.3750 level to position for a break of recent support.
A more cost-effective approach could be a bear put spread, which involves buying a higher-strike put and selling a lower-strike put simultaneously. For example, buying a 1.3750 put and selling a 1.3650 put would reduce the initial cash outlay. This strategy would profit from a steady decline toward the mid-1.3600s.
The primary risk to this bearish outlook remains the uncertainty surrounding US-Canada trade negotiations. Any surprisingly positive announcement from President Trump could cause a sharp, albeit likely temporary, rally in the pair. This potential for sudden volatility further supports using options over shorting futures, as the maximum loss is known in advance.
Looking back to a similar policy divergence in late 2024, we saw the USD/CAD fall over 300 pips in the two weeks following the central bank announcements. While past performance is not indicative of future results, it highlights how quickly the pair can move when monetary policies diverge this clearly. We see the current setup as a compelling opportunity for a repeat of that type of price action.
