The USD/CAD pair experienced a rally, which can likely be characterized as a response to an oversold condition. A recovery would likely result in a rally of the US dollar against numerous other currencies simultaneously. The oil markets have exhibited a lack of substantial strength in recent months, which does not favor the Canadian dollar. However, the Federal Reserve is anticipated to reduce rates in 2026, while the Bank of Canada is projected to maintain its current stance.
The interest rate differential does indeed contribute to a slight weakening of the US dollar relative to the Canadian dollar, and the recent trends over the past few weeks illustrate this dynamic clearly for USD/CAD. The recent bounce indicates that there may be some value-seeking activity or possibly short covering as we approach New Year’s Day. The 1.3750 level is a significant area that I believe holds importance extending up to the 1.38 level.
Should USD/CAD surpass the 1.38 level, it is my assessment that the US dollar has the potential to rise significantly. Conversely, a breakdown beneath the 1.36 level would pave the way for a decline towards the 1.3550 level, a significant zone of contention that has been tested multiple times previously and most recently exhibited a triple bottom pattern during the summer.
This is a level that appears challenging to penetrate downward. We will need to monitor the situation closely to determine if that will serve as significant support once more, but it wouldn’t be unexpected to ultimately find ourselves in a certain range. Ultimately, USD/CAD tends to operate in this manner, as the majority of transactions between US dollars and Canadian dollars are driven by necessity rather than speculation.