USD/CAD traded lower near 1.3670 in early European trading on Thursday, keeping the Canadian Dollar supported above 1.3650. The move followed a softer US Dollar amid uncertainty about US economic policy and possible tariff increases.
US Trade Representative Jamieson Greer said on Wednesday that President Donald Trump plans to raise the tariff rate to 15% or higher for many countries in the coming days. This power lasts for 150 days unless Congress extends it.
Key Market Drivers
Oil prices can affect the Canadian Dollar because Canada is a major oil exporter, and higher crude prices often support CAD. Markets are also watching US-Iran nuclear talks, with officials due to meet in Geneva on Thursday for a third round of indirect discussions.
Canada’s GDP and the US Producer Price Index (PPI) are due on Friday. For the US PPI, forecasts are 0.3% month-on-month in January versus 0.5% in December, and 2.6% year-on-year versus 3.0% previously.
CAD drivers include Bank of Canada interest rates, oil prices, inflation, trade balance, overall economic data, market risk appetite, and US economic conditions. Inflation policy aims to keep inflation in a 1–3% range.
Looking back at the situation in early 2025, we saw the US dollar soften due to uncertainty over potential trade tariffs. This environment provided a supportive backdrop for the Canadian dollar, keeping the USD/CAD pair below the 1.3700 level. Those tariff concerns eventually subsided, but the focus quickly shifted to persistent inflation data on both sides of the border.
Options Strategy Outlook
The “hotter-than-expected” US Producer Price Index data that we saw in January 2025 set a tone for the rest of that year, forcing the Federal Reserve to delay any planned rate cuts. However, Canada has faced its own inflation challenges, with the latest data from Statistics Canada for January 2026 showing the annual inflation rate holding firm at 2.8%. This persistence keeps pressure on the Bank of Canada to not diverge too far from the Fed’s policy path.
The geopolitical risks mentioned back in 2025 have continued to provide a tailwind for crude oil, a key export for Canada. With WTI crude prices currently hovering around $85 a barrel, reflecting ongoing tensions in the Middle East, the commodity-linked loonie has a solid floor of support. This has helped cap any significant upside for the USD/CAD pair over the past year.
Given these competing factors, with both central banks remaining cautious, implied volatility in USD/CAD options may be undervalued. We believe purchasing straddles or strangles could be an effective strategy over the coming weeks. This approach would profit from a significant price move in either direction, which could be triggered by the next major inflation report or a sudden shift in oil markets.
Alternatively, for those expecting the Canadian dollar to remain strong, selling USD/CAD call options with strike prices above 1.3800 offers a way to collect premium. This strategy capitalizes on the view that elevated oil prices and a relatively hawkish Bank of Canada will prevent a significant breakout to the upside. It is a calculated play on the range-bound nature we have witnessed recently.
