Rabobank expects USD/CAD to trade sideways through 2026, as US–Canada trade tensions and risks around the USMCA review offset a weaker US Dollar. It sees the pair held in a 1.36–1.41 range, with a “tariff premium” weighing on the Canadian Dollar.
A narrower US–Canada rate differential is expected to limit US Dollar strength, keeping USD/CAD range-bound. Another stated range for the pair is 1.37–1.40, based on the same balancing forces.
Key Correlations And Drivers
USD/CAD is described as moving again with the US–Canada 2-year rate differential and moving inversely to oil. Oil is described as a key driver for CAD mainly when oil prices move sharply and quickly.
Implied volatility is expected to rise rather than return quickly to the low-volatility conditions of December 2025. The official USMCA review date is July 1, described as four and a half months away, with uncertainty around US–Canada relations linked to further volatility.
In the coming weeks, we see USD/CAD being stuck in a tug-of-war, keeping it within a 1.36 to 1.41 range. The risk of trade tariffs is putting a ceiling on the Canadian dollar, but this is balanced by an overall weaker US dollar. This suggests that betting on a major breakout in either direction is a risky play right now.
This view is supported by the narrowing interest rate spread between the US and Canada, which has tightened to just 20 basis points as of early February 2026, down from over 50 basis points late in 2025. This makes holding US dollars less attractive. However, January’s cross-border trade data showed a 1.2% decline, the first monthly drop in half a year, reflecting the market’s growing anxiety over trade relations.
Trading Approaches For A Range Bound Market
Given the expectation for a bumpy ride rather than the calm we saw in December 2025, buying volatility seems like a sensible approach. Implied volatility on 3-month options has already crept up to 7.9% from lows of 6.5%, and we expect this to continue rising. Using strategies like long strangles, which profit from a large price move in either direction, could be advantageous.
The main event on our horizon is the USMCA review, now just over four months away on July 1st. In the weeks ahead, traders should look at options contracts that expire after this date to capture the expected price swings. These longer-dated options will likely become more expensive as the review date approaches.
For those looking to trade the range itself, selling options at the boundaries of the 1.36-1.41 channel could generate income. This could involve writing out-of-the-money call options with strike prices above 1.41. Similarly, selling puts below the 1.36 support level is a way to collect premium, betting that the floor will hold.
