USD/CAD fell to about 1.3695 in Asian trading on Thursday, with higher crude oil prices supporting the Canadian Dollar. Oil prices rose amid ongoing tensions between the US and Iran, and Canada is a major oil exporter.
Canada’s CPI inflation slowed to 2.3% year on year in January from 2.4% in December, based on Statistics Canada data released on Tuesday. The outcome was below the 2.4% market forecast, increasing expectations of another Bank of Canada rate cut.
Market Drivers In Focus
US support for the US Dollar came from January Federal Open Market Committee minutes. Several policymakers said rates might need to rise if inflation stays high.
On Friday, markets look to the preliminary US GDP reading for Q4, plus the PCE Price Index and S&P Global PMI data. These releases may affect near-term USD/CAD moves.
Looking back to early 2025, we saw the setup for a key divergence between the US and Canada. Softer Canadian inflation was already hinting at Bank of Canada (BoC) rate cuts, while the Federal Reserve was still sounding hawkish. This tension between monetary policies has defined the trading landscape for the past year.
That forecast for Canadian policy proved correct, as the BoC began cutting rates in mid-2025 and has brought its policy rate down to 3.75%. The latest inflation data from January 2026 showed the Consumer Price Index (CPI) at 2.1%, reinforcing the view that the BoC has room for further easing. This continues to place downward pressure on the Canadian dollar.
Policy Divergence And Trading Implications
Meanwhile, the US story has been one of persistence. The Federal Reserve has held rates steady at a higher level, as core Personal Consumption Expenditures (PCE) inflation just came in at 2.8% for January 2026, still well above their target. This has widened the interest rate gap between the US and Canada, making the US dollar more attractive.
This policy gap has generally pushed the USD/CAD pair higher over the last twelve months, moving it from the 1.3700 area towards 1.3900. However, strong oil prices have provided a significant floor for the Canadian dollar, with WTI crude currently trading above $85 a barrel. These conflicting forces—a wide rate differential and high energy prices—are creating a tense balance in the market.
For the coming weeks, selling volatility in USD/CAD could be a viable strategy. Given the strong but opposing drivers, the pair may remain within a defined range. Traders could consider selling strangles, which involves selling an out-of-the-money call option and put option to collect premium, profiting if the pair does not make a large move in either direction.
Alternatively, if we expect oil price volatility to pick up, buying options offers a defined-risk way to take a directional view. A trader who believes a further spike in energy prices will finally strengthen the loonie could buy USD/CAD put options. Conversely, a belief that the interest rate differential will overpower oil would favour buying call options.
