The USD Index Update
The USD Index recovers from its lowest since February 2022 amid dovish Fed expectations, despite the recovery looking capped. A rate cut is anticipated twice this year, with a new Fed Chair pending announcement. Efforts to dismiss Fed Governor Lisa Cook raise concerns over central bank independence. Rising economic and geopolitical risks, alongside increased Crude Oil prices since October 2025, could support the Loonie, constraining USD/CAD gains. Overall, a clear buying trend is awaited to confirm a bottom in spot prices.
Given the sharp reversal from the lows we saw since last July, we face significant event risk with both the Bank of Canada and the Fed announcing rates today. The market is caught between a fundamentally weak US dollar and a Canadian economy sending mixed signals that could force the BoC’s hand. This creates a tense setup where the path of least resistance isn’t clear in the immediate term.
For the coming weeks, we should consider strategies that benefit from a spike in volatility, as a surprise from either central bank could trigger a sharp move. One-week implied volatility for USD/CAD options has already climbed to 9.8%, reflecting the market’s anxiety over these back-to-back announcements. Buying a simple straddle or strangle could be an effective way to play a breakout from the current tight range.
Potential USD/CAD Strategies
If we believe the recent strength in oil, with WTI crude pushing past $92 a barrel, will outweigh a dovish BoC, then this bounce to 1.3600 looks like a selling opportunity. A bear call spread, selling the 1.3650 calls and buying the 1.3700 calls for protection, would allow us to collect a premium. This position benefits if the pair stays flat or resumes its downtrend driven by the weak US dollar outlook.
Conversely, a more dovish surprise from the BoC remains a distinct possibility, especially after last week’s jobs report showed a surprise contraction of 5,000 positions in December 2025. In this scenario, we could see USD/CAD rally sharply as the Canadian dollar weakens. A bull put spread, selling puts at the 1.3550 strike, could be used to bet that the recent lows will hold as support.
This environment reminds us of the divergence we saw in central bank policy during 2024, which led to sharp currency swings. With the Fed funds futures market pricing in a 75% chance of another rate cut by June and continued uncertainty over the next Fed Chair, hedging existing exposures is critical. Even simple puts against long USD/CAD positions should be considered to protect capital against an unexpectedly dovish Fed outcome.
