The USD/CAD pair is holding steady after a 0.5% rise in the last session, largely due to falling oil prices. The price of West Texas Intermediate (WTI) oil has dropped to around $61.20 per barrel, which is pressuring the Canadian Dollar (CAD) since Canada is the US’s largest oil supplier. Currently, USD/CAD is trading close to a six-month high of 1.4020. The CAD is struggling because of lower oil prices. The easing of geopolitical tensions, following the Israel-Hamas ceasefire, has also relaxed some pressure on oil prices.

The Greenback’s Rise

The Greenback’s rise has slowed down because of budget disagreements in the government, which are affecting the USD/CAD pair. Still, the pair might strengthen as investors seek safe-haven assets, boosting the USD, even with uncertain signals from the US Federal Reserve regarding future policies. The value of the Canadian Dollar depends on several factors like interest rates set by the Bank of Canada, oil prices, Canada’s economic performance, inflation, and trade balance. The Bank of Canada adjusts interest rates to keep inflation between 1-3%, which directly affects the CAD. Generally, higher oil prices support the CAD because they significantly contribute to Canada’s economy. Economic indicators, such as GDP and employment data, also impact the CAD, with a strong economy increasing demand for it. The USD/CAD pair is showing strength above the important 1.4000 level, a significant psychological and technical point. This strength has been building for weeks, indicating that attempts to bet against the US dollar in favor of the Canadian dollar have not worked. We should keep this trend in mind going forward. The sharp decline in WTI crude oil to around $61 a barrel poses a serious challenge for the loonie, particularly since prices were in the mid-$70s just a few months ago. Recent data from the Energy Information Administration highlighted an unexpected increase in oil inventories by 2.1 million barrels last week, adding to the bearish outlook for oil. This makes it tough to argue for a stronger Canadian dollar right now.

Volatility and Interest Rate Predictions

Despite the US dollar’s recent strength, we must consider the cautious signals from the Federal Reserve, which cut rates last month in September 2025. Markets are responding, with the CME FedWatch Tool indicating about a 60% chance of another rate cut at the November meeting. This expectation could limit further increases in the US dollar and may create volatility. With the Canadian dollar weakening due to oil prices and the US dollar potentially weakening from Fed policy, it’s important to watch the implied volatility in USD/CAD options. Traders might look into strategies like straddles or strangles to prepare for potential significant price movements in either direction, especially ahead of the next FOMC meeting. These strategies can benefit from uncertainty without needing to predict a specific direction. While the 1.4000 level might seem high for the pair, consider the market turbulence during the 2020 pandemic, when USD/CAD spiked above 1.4600. This historical context suggests that although the current level is elevated, bigger movements have happened before. Thus, we should be cautious about assuming that this is the highest point for the pair. The key difference to monitor is between a Federal Reserve indicating more rate cuts and a Bank of Canada that may hesitate to act. If upcoming Canadian inflation data remains steady, the BoC might keep its interest rates unchanged, leading to a policy conflict that favors USD/CAD strength. This interest rate gap is a critical factor supporting the US dollar side of the pair for now. Create your live VT Markets account and start trading now.

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