USD/CAD bears are struggling to capitalize on the divergence in monetary policy between the Fed and the Bank of Canada, but Donald Trump’s anger could create significant challenges. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Canada’s economy has unexpectedly expanded.
- The BoC has ended its easing cycle.
- Canada employs fiscal stimulus measures.
- Short trades on the USD/CAD pair can be opened with targets of 1.387 and 1.38.
Weekly Fundamental Forecast for Canadian Dollar
Canada is a country of contrasts. It is almost the only country that refused to make concessions to Donald Trump and continues its trade war with the US. Against this backdrop, the economy should have slipped into a recession, but the Canadian GDP unexpectedly grew by 2.6% in the third quarter. Foreign direct investment fell to CA$18.2 billion in July–September, but Canadian firms continue to generate profits. The Fed–BoC rate differential widened in 2025, but the USD/CAD pair is falling.
Canada’s GDP Growth
Source: Bloomberg.
The very fact of waging a trade war with a superior rival should have spooked loonie bulls. According to 67% of Canadian respondents to a Nanos Research Group survey, Canada will not reach an agreement with the US within the next six months. Moreover, the country has recently introduced a 25% tariff on steel derivative products to help domestic producers. Notably, about 40% of such goods come from the United States.
Since Canada is a member of the North American Free Trade Agreement, some of its products are exempted from US tariffs. However, if Donald Trump fulfills his threat to withdraw from the agreement, the US will demand whatever it wants from its neighbors, given that in 2024, 75% of Canadian exports went to the United States.
The trade war and tougher requirements for migrants are causing retail sales to slow to their lowest levels in a year. Consumer spending is waning, but what is driving economic growth? The main drivers are government spending and investment in real estate. In an attempt to offset the negative impact of trade disputes, the Canadian government has rolled out a fiscal stimulus bazooka, while the central bank has supported it with aggressive rate cuts.
Canada’s Inflation Rate
Source: Bloomberg.
In the spring of 2024, the overnight rate was 5%. In the fall of 2025, it was decreased to 2.25%. Moreover, the Bank of Canada announced that it was unwilling to continue the cycle amid persistently high inflation. Given expectations that the Fed will cut the federal funds rate by 100 basis points by the end of next year, this creates a tailwind for USD/CAD bears.
Canada and its currency are navigating muddy waters. Ottawa’s unwillingness to make concessions to Washington could annoy Donald Trump at any moment. The US withdrawal from the North American Free Trade Agreement will deal a severe blow to Canadian exports. However, the US leader has more important issues to worry about right now.
Weekly USDCAD Trading Plan
Against this backdrop, USD/CAD bears are benefiting from the divergence in monetary policy between the Fed and the Bank of Canada. The US dollar could reach CA$1.387 and CA$1.38. The recommendation is to sell.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.