USD/CAD steadies around 1.3800 as tensions between the US and Europe ease. This comes after President Trump secured a NATO framework agreement, although specifics remain unclear.
Oil prices rise partly due to Saudi Aramco’s CEO dismissing oversupply concerns, citing strong emerging-market demand. The USD/CAD pair halts a four-day losing streak, trading near 1.3790 during European hours as the US Dollar shows recovery.
Us Nato Deal Details
The recent US-NATO deal might involve mineral rights and missile deployments, yet details are still emerging. Meanwhile, the US annual core PCE Price Index, which is a favoured inflation gauge, increased by 2.8% in November.
The Canadian Dollar could gain support from higher Oil prices, considering Canada is the largest crude exporter to the US. West Texas Intermediate Oil prices recover after losing over 2% earlier, trading around $59.60 per barrel.
The Canadian Dollar is influenced by factors such as the Bank of Canada’s interest rate levels and Oil prices. Macroeconomic indicators like GDP and employment data also impact the currency. Higher inflation usually leads to interest rate hikes, increasing the demand for the Canadian Dollar.
The market dynamics have shifted since we saw that 95% probability of a rate cut back in late 2025. The Federal Reserve did indeed proceed with a 25-basis-point cut in December, and we are now assessing the fallout. This has kept the US Dollar on the defensive in the first few weeks of 2026.
Canadian Dollar Gains Strength
The Canadian Dollar is showing notable strength, in part because of higher oil prices. West Texas Intermediate, which was trading below $60 a barrel when we were looking at it last year, is now holding firmly above $65. This resilience is supported by recent data showing global oil consumption in 2025 surpassed expectations, driven by demand from Asia.
We should also note the divergence in central bank policy that is influencing the USD/CAD pair. While the Fed eased its policy stance, the Bank of Canada held its key interest rate steady earlier this month, citing robust employment numbers. This narrowing of the interest rate differential makes holding Canadian dollars more attractive than it was a few months ago.
Looking back, the November 2025 core PCE reading of 2.8% was a key factor in the Fed’s decision to cut rates. The most recent data for December showed inflation cooling slightly to 2.7%, which suggests the Fed may now pause for the next quarter. This reinforces the idea that the US Dollar may lack a strong catalyst for appreciation in the near term.
For the coming weeks, this environment suggests potential for further Canadian dollar strength against the US dollar, which is now trading near 1.3550. We could consider strategies that benefit from a declining or range-bound USD/CAD, such as buying puts on the pair. Selling out-of-the-money calls could also be a viable strategy if we expect the pair to stay below the 1.3800 level seen last year.
