USD/CAD continued its upward movement, trading around 1.3750 during Asian hours on Monday. This increase was fuelled by the strength of the US Dollar amid heightened geopolitical tensions, especially following the capture of Venezuelan President Nicolas Maduro by the US.
US President Donald Trump indicated the possibility of a military intervention if Venezuela’s interim president does not comply with US demands. Additionally, remarks were made about potential actions concerning Colombia, Mexico, and Cuba.
Federal Reserve Rate Cuts Expected
Traders anticipate two more Federal Reserve rate cuts in 2026, as suggested by the Federal Open Market Committee’s December Meeting Minutes. Markets are on edge due to the upcoming nomination of a new Fed chair, a decision that may influence interest rates.
The Canadian Dollar (CAD) could gain strength if Oil prices rise, yet, West Texas Intermediate Oil remains stable, trading at about $57.20 per barrel. Market reactions to the US attack on Venezuela were mixed, given Venezuela’s low oil production compared to global output.
The Canadian Dollar is influenced by factors including Bank of Canada interest rates, Oil prices, and economic data. High Oil prices and a robust economy typically enhance the CAD, while weaker data may diminish its value.
The current situation is pushing USD/CAD higher toward 1.3750 due to a classic flight to safety. The US dollar is strengthening as geopolitical tensions rise in South America, a dynamic we last saw during similar risk events in 2024 when the VIX index spiked above 30. For now, we see the path of least resistance as being higher for the pair.
Monetary Policy Expectations
However, this strength in the US dollar faces a significant headwind from monetary policy expectations. Markets are pricing in two Federal Reserve rate cuts this year, and the potential for a new, more dovish Fed Chair in May could accelerate this trend. This creates a conflict between short-term safe-haven demand and the medium-term outlook for a weaker dollar.
This uncertainty suggests that volatility is the main trade to consider in the coming weeks. We are seeing one-month implied volatility for USD/CAD jump to over 8.5%, reflecting the market’s nervousness about a sharp move in either direction. Using options strategies like straddles or strangles could be an effective way to profit from this expected increase in price swings.
The oil market remains a wildcard that could cap the upside for the currency pair. While Venezuela’s production is low at under 800,000 barrels per day, any sign of the conflict spreading to major regional producers like Colombia or Mexico would likely cause a spike in WTI prices. A significant rise in oil would provide strong support for the commodity-linked Canadian dollar, pushing USD/CAD lower.
We should also be aware of the potential for policy divergence between the central banks. Canada’s inflation rate, which was running at 3.1% in late 2025, may keep the Bank of Canada from cutting interest rates as aggressively as the US Federal Reserve. This difference in policy would be fundamentally supportive for the Canadian dollar against its US counterpart.
Given these conflicting signals, we believe making large directional bets is risky at this moment. Instead, using derivatives to define risk, such as buying call spreads to bet on a limited move higher, may be a more prudent approach. This allows for participation in the current upward momentum while protecting against a sudden reversal caused by a change in the geopolitical or interest rate narrative.
