Photo by Michelle Spollen on Unsplash
 

The Canadian Dollar (CAD) holds modest gains against the US Dollar (USD) on Wednesday, even as the Greenback trades firm amid limited movement as markets drift into holiday mode. At the time of writing, USD/CAD is trading around 1.3675, hovering near its lowest level since July 25.

Gross Domestic Product (GDP) data released on Tuesday did little to shift sentiment around USD/CAD. Canada’s economy contracted by 0.3% MoM in October, matching forecasts and reversing a 0.2% gain in the prior month. Meanwhile, the preliminary estimate of third-quarter GDP showed the US economy grew at a strong annualised pace of 4.3%, beating both the prior estimate of 3.8% and the market expectation of 3.3%.

The Loonie remains underpinned by a widening policy divergence between the Bank of Canada (BoC) and the Federal Reserve (Fed). The BoC kept its policy rate unchanged at 2.25% at its December meeting and signalled comfort with its current policy stance, saying current settings are appropriate to support the economy while keeping inflation close to the 2% target.

Markets have largely interpreted the decision as marking the end of the BoC’s easing cycle, following a cumulative 100 basis points (bps) of rate cuts since the beginning of the year. In its latest meeting minutes, Governing Council members acknowledged that uncertainty remains elevated and discussed whether the next policy move would be a hike or a cut. While officials agreed that the current policy rate is “about right” for now, they stressed that the timing and direction of the next adjustment remain difficult to predict.

That said, the base-case view is for the BoC to keep the policy rate around 2.25% through most of next year, with some upside risk that the next move could be a hike in the second half of 2026.

In contrast, the Fed is seen moving along a more gradual easing path. Markets expect further monetary policy easing next year after the Fed delivered a total of 75 bps of rate cuts this year. However, policymakers remain divided on the need for additional cuts, citing differing views on inflation and labour market conditions.

However, markets widely expect the Fed to hold rates steady in January, with CME FedWatch pricing just a 13% chance of a cut, while still anticipating two rate cuts later in the year.

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