Loonie Holds the Upper Hand as Policy Gap Pressures USD/CAD

The Canadian dollar maintained a modest edge against its U.S. counterpart, keeping USD/CAD pinned near five-month lows as subdued holiday liquidity capped volatility. The pair hovered around 1.3675, close to its weakest level since late July, with price action driven more by policy expectations than fresh data.

GDP Data Fails to Shift the Narrative

Recent growth figures on both sides of the border did little to alter market positioning. Canada’s economy contracted in October, in line with forecasts and reversing the prior month’s expansion. In contrast, U.S. third-quarter growth was revised higher, confirming solid momentum. Despite the divergence in headline growth, the data failed to spark a sustained rebound in the U.S. dollar against the loonie.


Policy Divergence Anchors Canadian Dollar Strength

The Canadian dollar continues to draw support from a widening gap between monetary policy paths in Canada and the United States. Canada’s central bank left rates unchanged at its latest meeting and signaled comfort with current settings, emphasizing that policy remains appropriate to support growth while keeping inflation near target.


Markets have largely interpreted this stance as the end of the easing cycle, following significant rate cuts earlier in the year. Policymakers have acknowledged lingering uncertainty, debating whether the next move could eventually be a hike or a cut, but broadly agreeing that rates are well-calibrated for now.


Rates Seen on Hold in Canada, Easing Bias in the U.S.


The prevailing view is that Canadian interest rates will remain steady through most of next year, with a non-negligible chance that the next adjustment could be higher in the second half of 2026. This contrasts with expectations south of the border, where the U.S. central bank is seen continuing a slow and cautious easing cycle.


While U.S. policymakers remain divided over the need for further cuts, markets still anticipate additional easing later in the year after multiple reductions already delivered. Near-term expectations, however, point to a pause, reinforcing the perception that relative policy settings favor the Canadian dollar.


Outlook: Structural Bias Keeps USD/CAD on the Defensive


With volatility muted and holiday conditions thinning volumes, near-term moves may remain limited. Still, as long as policy divergence remains intact and expectations for Canadian rate stability hold, USD/CAD is likely to stay under pressure, leaving rallies shallow and reinforcing the loonie’s relative resilience.