Unlike the Fed, the Bank of Canada believes that its key rate is at the right level. Meanwhile, upbeat economic statistics allow the futures market to expect a rate hike in 2026. Let’s discuss this topic and make a trading plan for the USD/CAD pair.
The article covers the following subjects:
Major Takeaways
- The Bank of Canada hints at the end of the cycle.
- Divergence in monetary policy supports the loonie.
- The Canadian economy is showing robust performance.
- Traders may lock in profits on short positions.
Weekly Fundamental Forecast for Canadian Dollar
As a rule, the US Fed has long been a trendsetter. Other central banks eagerly await Fed decisions. Thus, the Swiss franc and the British pound became the main beneficiaries of the FOMC’s hawkish stance. The Fed’s pause ruled out the SNB returning to negative rates and increased the chances that the Bank of England will pause after easing monetary policy in December. The Bank of Canada has already done so, pushing the USD/CAD pair lower.
As all 13 Wall Street Journal analysts expected, the overnight rate remained at 2.25%, and the BoC noted that it was in the right place. If the October forecasts come true, it would be appropriate to keep borrowing costs at the lower end of the neutral range.
Bank of Canada’s Overnight Rate
Source: Bloomberg.
The Bank of Canada is putting on a brave face despite the bad news. The financial regulator was surprised by the 2.6% surge in GDP in July–September, which is significantly higher than the BoC’s estimate of 0.5%. Tiff Macklem explained this trend by pointing to the volatility of trade data, particularly the decline in imports. At the same time, the economic slowdown in October–December will lead to the regulator’s expected expansion of 1.1% by the end of 2025.
However, the surge in GDP in the third quarter is not the only positive factor. In November, Canadian employment jumped by 53,600, bringing the three-month figure to 180,600. This fully offsets the summer job losses and suggests that the economy is absorbing tariffs much faster than might have been expected. This is proven by the drop in unemployment to a 16-month low of 6.5%.
The futures market is beginning to factor in an increase in the overnight rate by the end of 2026. The divergence in monetary policy between the Fed and the Bank of Canada allows USD/CAD bears to push the price down.
Market Expectations for BoC Overnight Rate
Source: Bloomberg.
In addition to the ECB, the Reserve Banks of New Zealand and Australia, the BoC has become another central bank that may not only put its monetary expansion cycle on hold for an extended period, but also raise rates in 2026. The paths of the regulators diverge from those of the Fed, as the US is still set on easing monetary policy.
In the coming days, the market will digest signals from central banks, and the USD/CAD pair will likely consolidate amid expectations of extremely important US employment statistics for November. This report will also include the October figures lost due to the shutdown.
Weekly USDCAD Trading Plan
Only further cooling of the US labor market will allow traders to use a divergence in monetary policy. For now, traders may lock in profits on short positions, as the USD/CAD pair has hit both targets of 1.387 and 1.38.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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