The Canadian Dollar's Resilience: A Strategic Case for Carry Trade and Currency Carry Opportunities

The Canadian dollar (CAD) has demonstrated unexpected resilience in 2025, defying conventional wisdom that aggressive rate cuts by the Bank of Canada (BoC) would weaken its value. This resilience stems from a confluence of policy divergence among major central banks and divergent macroeconomic momentum across key economies. For investors, this dynamic creates a compelling case for re-evaluating carry trade strategies, particularly in the context of CAD's positioning relative to the U.S. dollar (USD) and the euro (EUR).

Policy Divergence: A Tailwind for CAD

The BoC's 2025 monetary policy trajectory has been marked by a 25-basis-point rate cut in September, with expectations of another reduction in October 2025 according to analysis. This contrasts sharply with the U.S. Federal Reserve (Fed), which has maintained its federal-funds rate at 4.25% to 4.50%, signaling a cautious approach to rate cuts until mid-September 2025 as reported. Meanwhile, the European Central Bank (ECB) slashed rates by 25 bps in September 2025, though it has hinted at a potential pause in its rate-cutting cycle according to sources.

This divergence reflects underlying economic realities: the U.S. economy remains robust, with GDP growth and low unemployment insulating it from inflationary shocks, while Canada and the eurozone grapple with weaker momentum and trade disruptions according to research. The BoC's October 2025 Monetary Policy Report underscored that Canadian inflation remains near 2%, but underlying pressures persist, necessitating a data-dependent approach as stated in the report. The ECB, meanwhile, projects 2025 growth at 1.2% and notes inflation is "currently aligned" with its 2% target according to official statements.

The Fed's reluctance to follow suit has created a widening yield differential between the USD and CAD. While the BoC's rate cuts have traditionally pressured the CAD, the Fed's higher rates have provided a floor for CAD strength relative to the euro, which faces both lower rates and weaker growth. This divergence positions the USD as a higher-yielding asset in the short term, but the BoC's proactive easing may stabilize CAD fundamentals over time.

Macroeconomic Momentum: CAD's Hidden Strength

Despite the BoC's rate cuts, the CAD has benefited from its unique exposure to global commodity markets and trade flows. Canada's economy, heavily reliant on exports of energy and raw materials, has been less vulnerable to U.S. tariff-driven inflation than the eurozone according to analysis. While the Fed absorbs inflationary shocks from trade tensions, Canada's export sector has seen improved pricing power, particularly in energy markets, which has offset some of the drag from weaker domestic demand as reported.

Moreover, the BoC's rate cuts have been calibrated to avoid triggering a sharp depreciation. By maintaining a 2.75% policy rate-higher than the ECB's 2.00%-the BoC has preserved a modest yield advantage over the euro, which has helped CAD outperform the EUR in 2025 according to market data. This dynamic is critical for carry trade strategies, as investors seek to exploit yield differentials without overexposure to currency volatility.

Carry Trade Opportunities: Navigating the Divergence

The current policy landscape offers two primary carry trade opportunities involving the CAD:
1. Short CAD/Long USD: While the BoC continues to cut rates, the Fed's higher-for-longer stance ensures a widening yield gap. Investors could borrow CAD (at lower rates) to fund USD investments, capitalizing on the USD's relative strength. However, this strategy carries risk if the BoC's rate cuts accelerate and trigger CAD depreciation.
2. Short EUR/Long CAD: The ECB's rate-cutting cycle nearing its end, combined with the BoC's higher policy rate, creates a narrower yield differential. Yet, CAD's stronger commodity-linked fundamentals and better trade balance make it a more attractive carry currency against the EUR according to market analysis.

For risk-managed carry trades, the CAD's resilience offers a buffer. Unlike the EUR, which faces deflationary pressures and structural growth challenges, the CAD's exposure to global energy markets provides a stabilizing force. As noted by Russell Investments, "Canadian and European central banks have lowered rates while the U.S. remains cautious, creating asymmetric risks for currency carry strategies" according to research.

Conclusion: A Strategic Case for CAD-Centric Carry Trades

The Canadian dollar's resilience in 2025 is not a fluke but a product of deliberate policy divergence and macroeconomic asymmetries. While the BoC's rate cuts have traditionally pressured the CAD, the Fed's higher rates and the ECB's weaker growth outlook have created a unique window for carry trade opportunities. Investors who position themselves to exploit these dynamics-particularly through CAD-long strategies against the EUR-stand to benefit from both yield differentials and CAD's structural advantages in global trade.

As central banks meet in late September 2025 to reassess their policies according to market reports, the CAD's trajectory will hinge on how these divergences evolve. For now, the data supports a strategic, risk-aware approach to currency carry trades centered on the Canadian dollar.