The USD/CAD currency pair faces difficulties trading below 1.3700 as the Canadian dollar gains strength from stable Oil prices. During Asian trading hours, the USD/CAD was around 1.3680, influenced by Canada’s position as a leading crude supplier to the US.
West Texas Intermediate (WTI) Oil prices held steady, trading at about $57.80, following a 1.6% gain in the prior session. Geopolitical tensions, including Venezuela’s Oil shutdowns and Ukraine’s ongoing conflict, contribute to the currency dynamics.
Interest Rates And USD CAD
The Bank of Canada’s recent communications suggest a likelihood of maintaining current interest rates, impacting the CAD negatively. Meanwhile, expectations surround the Federal Reserve’s potential rate cuts in 2026, which could further influence the USD/CAD pair.
Several factors such as interest rates, Oil prices, and Canada’s economic health drive the Canadian dollar. The Bank of Canada aims to maintain inflation between 1-3% by adjusting rates, with higher rates usually benefiting the CAD.
Oil prices also affect CAD value significantly, with rises generally leading to increased demand for the currency. Economic indicators like GDP and unemployment rates further influence the currency’s strength.
With USD/CAD holding below the 1.3700 level, the main driver is the strength in oil prices, which directly supports the Canadian dollar. West Texas Intermediate crude is holding firm around $82 a barrel, bolstered by the recent OPEC+ decision in early December 2025 to maintain production cuts into the new year. This price stability provides a strong floor for the loonie.
Geopolitical Tensions And Oil Prices
Geopolitical tensions continue to place a risk premium on crude oil, preventing any significant price drops that would weaken the Canadian dollar. We are seeing continued supply concerns from Venezuela and persistent instability in the Middle East. These factors are likely to keep oil prices supported well into the first quarter of 2026.
On the other side of the pair, we see developing weakness in the US dollar as markets anticipate a more dovish Federal Reserve. We’ve seen US inflation cool, with the November 2025 CPI data showing a drop to 2.8%, moving closer to the Fed’s target. This reinforces the market’s pricing of at least two interest rate cuts in 2026.
Here in Canada, a similar cooling trend is evident, though inflation remains a bit sticky at 3.1%, giving the Bank of Canada reason to pause. This neutral stance from the BoC, when contrasted with an expectedly dovish Fed, creates a fundamentally bearish outlook for the USD/CAD pair. Looking back, this is a very different policy environment than the aggressive hiking cycle we saw from both central banks in 2022 and 2023.
Given the market’s focus on the FOMC minutes later today, we are seeing elevated implied volatility in USD/CAD options. This suggests options are pricing in a significant move, but the direction depends entirely on the Fed’s tone. A confirmation of a dovish outlook could cause volatility to collapse and the pair to drift lower.
For the coming weeks, selling call spreads with a strike price above the 1.3750 resistance level could be a viable strategy to capitalize on the range-bound price action and high volatility. This approach profits if the pair stays below that key level. Alternatively, traders could wait for the post-announcement volatility crush to establish longer-term bearish positions at a better price.
