The USD/CAD currency pair is struggling to stay below 1.3700 as the Canadian dollar gains strength due to stable oil prices. During Asian trading hours, the USD/CAD was about 1.3680, largely thanks to Canada’s role as a major crude supplier to the U.S. West Texas Intermediate (WTI) oil prices remain steady at around $57.80 after a 1.6% increase in the previous session. Geopolitical issues, such as Venezuela’s oil shutdowns and the ongoing situation in Ukraine, are influencing currency movements.

Interest Rates and USD/CAD

The Bank of Canada has indicated that it may keep interest rates steady, which could negatively impact the CAD. Meanwhile, there are expectations that the Federal Reserve might cut rates in 2026, potentially affecting the USD/CAD pair further. The value of the Canadian dollar is driven by factors like interest rates, oil prices, and Canada’s overall economy. The Bank of Canada aims to keep inflation between 1-3% by adjusting rates, and higher rates generally support the CAD. Oil prices significantly impact the value of the CAD. When oil prices rise, the demand for the Canadian dollar typically increases. Economic indicators like GDP and unemployment rates also play a role in the strength of the currency. With USD/CAD below the 1.3700 mark, the main factor is the strength of oil prices, which supports the Canadian dollar. West Texas Intermediate crude is stable around $82 a barrel, thanks to OPEC+’s decision in early December 2025 to maintain production cuts into the new year. This price stability creates a solid foundation for the loonie.

Geopolitical Tensions and Oil Prices

Geopolitical tensions are keeping a risk premium on crude oil, preventing significant price drops that would weaken the Canadian dollar. Ongoing supply concerns from Venezuela and instability in the Middle East are likely to keep oil prices strong through the first quarter of 2026. On the other hand, the U.S. dollar is showing signs of weakness as markets expect a more cautious Federal Reserve. Recent U.S. inflation data shows a decrease, with November 2025’s CPI down to 2.8%, nearing the Fed’s target. This trend supports market expectations for at least two interest rate cuts in 2026. In Canada, there is a similar trend, though inflation remains somewhat sticky at 3.1%, which may lead the Bank of Canada to pause. This neutral stance from the BoC, in contrast to the Fed’s expected dovish approach, could create a bearish outlook for the USD/CAD pair. This marks a significant change from the aggressive rate hikes both central banks implemented in 2022 and 2023. As the market looks ahead to the FOMC minutes today, heightened implied volatility in USD/CAD options suggests a possibility of significant movement, depending on the Fed’s tone. If a dovish outlook is confirmed, we might see volatility diminish and the pair drift lower. In the upcoming weeks, selling call spreads with a strike price above the 1.3750 resistance level could be an effective strategy to take advantage of the price action within this range. This approach will yield profits if the pair stays below that key level. Alternatively, traders might wait for the post-announcement volatility drop to establish longer-term bearish positions at a better price. Create your live VT Markets account and start trading now.

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