USD/CAD steadies near the 1.3900 level, supported by robust US economic data suggesting the Federal Reserve may hold interest rates. US Retail Sales increased 0.6% in November to $735.9 billion, surpassing expectations after a 0.1% decrease the previous month. The Commodity-linked Canadian Dollar (CAD) gains support from rising WTI Oil prices amid ongoing tensions in Iran.
The USD/CAD continues its positive movement, trading around 1.3890 during Asian hours. Positive US economic indicators, such as the Producer Price Index (PPI) rising 3% year-over-year in November, give strength to the US Dollar. The US Unemployment Rate eased to 4.4% in December, reinforcing the perspective of stable US interest rates. Morgan Stanley has subsequently postponed its estimation for rate cuts from January and April to June and September.
Factors Influencing CAD
The Canadian Dollar also benefits from its largest export, Oil, with current WTI Oil prices around $60.20. Tensions in Iran have raised Oil prices, which supports the CAD. The economies of Canada and the United States interlink, thus US economic conditions heavily influence the Canadian Dollar. Various factors, such as interest rates, inflation, and trade balance, also impact the value of the CAD.
Based on the strong US economic data we saw at the end of last year, the Federal Reserve appears to have solid ground to delay any interest rate cuts. We saw this in the November retail sales report, which jumped 0.6%, and the robust December jobs report that pushed unemployment down to 4.4%. This economic strength is likely to keep the US Dollar supported against other currencies, including the Canadian dollar.
This situation has shifted market expectations, with fed funds futures now pricing in a much lower probability of a rate cut in the first half of this year. We saw this trend begin late in 2025 when major banks adjusted their forecasts, a pattern reminiscent of 2023 when the market consistently anticipated a policy pivot that the Fed was not ready to make. The data so far in early 2026, including steady inflation figures from last week’s Consumer Price Index release showing core CPI holding firm at 3.1% year-over-year, gives us no reason to fight this trend.
Trading Strategy with USD/CAD
For derivative traders, this creates a compelling setup in USD/CAD. While the pair has been steady near 1.3900, this stability may be temporary as the powerful influence of Fed policy outweighs other factors. The low implied volatility we are currently seeing makes options strategies seem attractive, but we believe there is a clear directional bias emerging.
The main factor keeping the Canadian dollar strong is the price of oil, with West Texas Intermediate now pushing past $62 per barrel amid ongoing geopolitical tensions in the Middle East. As of this week, reports indicate shipping disruptions in the Strait of Hormuz have intensified, adding a risk premium to crude prices. This support for the loonie is what is preventing USD/CAD from breaking decisively higher.
Given the fundamentals, we view any dips in the USD/CAD exchange rate as buying opportunities. The Federal Reserve’s firm stance on interest rates provides a more durable tailwind for the US dollar than the volatile, event-driven spikes in oil prices do for the Canadian dollar. Traders should consider using long-dated call options, perhaps with March or April 2026 expiries, to position for a potential move above the 1.4000 level while limiting downside risk.
