The USD/CAD pair has remained above 1.3860 despite a generalised weakening of the US Dollar. Concerns about the US Federal Reserve’s independence have contributed to the Dollar’s decline across various currencies, although the USD/CAD reversal from 1.3915 has been limited.
A report about a US criminal probe into Fed President Jerome Powell has raised concerns regarding the Fed’s autonomy, contributing to the US Dollar’s fall. Powell found these actions unprecedented, suggesting efforts to influence central bank policies.
Impact of Oil Prices
Oil prices have experienced a mild pullback, impacting the Canadian Dollar negatively. WTI Oil prices dropped from $59.60 to $58.60, with a 2% increase since January but 23% lower than the June peak.
US macroeconomic data showed positive results with a lower unemployment rate and improved consumer sentiment. Meanwhile, Canada’s employment data revealed mixed results with job increases but a higher unemployment rate at 6.8%.
The Canadian Dollar is influenced by the Bank of Canada’s interest rates, Oil prices, economic health, inflation, and the Trade Balance. Higher interest rates are usually CAD-positive, while Oil price fluctuations significantly impact CAD value. Macroeconomic indicators like GDP and employment also affect CAD direction, with a strong economy bolstering the currency.
Given the political pressure on the US Federal Reserve, we are seeing a spike in short-term volatility in the US Dollar. However, the USD/CAD’s resilience above the 1.3860 level suggests underlying weakness in the Canadian dollar is the more dominant factor. Derivative traders should note that while the broader dollar is soft, this specific pair is not following the trend.
Canadian Economic Outlook
The Canadian story is not compelling, which helps explain the currency’s poor performance. Last week’s inflation data for December 2025 showed CPI cooling to 2.6%, below forecasts and moving closer to the Bank of Canada’s target range. This, combined with the earlier report showing Canadian unemployment unexpectedly rising to 6.8%, reduces any pressure on the BoC to keep interest rates high.
Furthermore, weakness in the energy market continues to weigh on the loonie. Last week’s EIA report showed a surprise build in US crude inventories of over 2 million barrels, pushing WTI prices back below $59 and keeping them far from the highs we saw in mid-2025. This persistent softness in oil prices directly impacts the value of Canada’s exports and investor sentiment towards the CAD.
This creates a clear policy divergence, where the US economy shows signs of resilience while the Canadian economy appears to be slowing down. We saw a similar dynamic in late 2023 when expectations of Fed policy staying tighter for longer than other central banks boosted the US dollar. This fundamental backdrop supports a higher USD/CAD exchange rate, regardless of the current political noise in Washington.
Therefore, traders should consider strategies that benefit from this divergence over the coming weeks. Buying USD/CAD call options with an expiration in February or March could capture potential upside if the pair breaks above its recent 1.3915 high. Alternatively, for those confident that the 1.3860 support will hold, selling cash-secured puts could be a way to collect premium from the elevated volatility.
