USD/CAD rose for a fifth straight day, trading near 1.3676, after softer Canadian inflation data weakened the Canadian Dollar. Canada’s CPI was 0.0% month-on-month in January versus a 0.1% forecast, and 2.3% year-on-year versus 2.4% expected.
BoC Core CPI increased 0.2% MoM in January after a 0.4% fall in December, while the annual core rate eased to 2.6% from 2.8%. The Bank of Canada has a 2% inflation target and an inflation control range of 1–3%, and it projected CPI to average 2.0% in 2026 (previously 2.1%) and 2.1% in 2027.
Canadian Inflation And Oil Weigh On The Loonie
Oil prices also weighed on the currency as Canada is a major crude exporter. WTI traded near $62.35, down about 1.95%, after a second round of US-Iran nuclear talks in Geneva.
The US Dollar strengthened, with the DXY near 97.34, up about 0.25%. US data showed the Empire State Manufacturing Index at 7.1 in February (forecast 6; prior 7.7) and the ADP Employment Change four-week average at 10.3K (revised prior 7.8K).
Markets are watching the FOMC minutes on Wednesday, then Core PCE inflation and the advance Q4 GDP estimate on Friday.
Looking back a year to early 2025, we saw the Canadian dollar weakening due to soft inflation and falling oil prices. At that time, Canadian CPI was just 2.3% year-over-year, giving the Bank of Canada plenty of room to stay on the sidelines. The situation today has shifted significantly.
The economic landscape has changed considerably over the last twelve months. The latest data for January 2026 shows Canadian inflation has accelerated to 2.9%, surprising many and putting pressure on the Bank of Canada to maintain its restrictive stance. This contrasts sharply with the disinflationary trend we were observing at this point last year.
Shifting Policy Divergence And Volatility Outlook
Furthermore, the price of oil, a critical driver for the loonie, has shown remarkable strength. West Texas Intermediate crude is now trading firmly above $80 a barrel, a world away from the $62 level seen in February 2025 when a potential US-Iran deal was weighing on prices. This sustained strength in energy provides a fundamental tailwind for the Canadian dollar that was absent a year ago.
On the other side of the pair, the US dollar remains broadly strong, with the DXY index trading near 104.5, much higher than the 97 level from last year. Stubborn US inflation data, recently coming in at 3.1% for January 2026, has forced markets to continue pushing back expectations for Federal Reserve rate cuts. This policy divergence, where the Fed remains hawkish and the BoC is now under renewed inflationary pressure, creates a complex backdrop.
Given these conflicting forces, we anticipate increased volatility in the USD/CAD pair in the coming weeks. While the strong Canadian inflation and high oil prices argue for a weaker USD/CAD, the persistent strength of the broader US dollar acts as a powerful counterbalance. Derivative traders should consider strategies that profit from price swings, such as long volatility positions using options.
