USD/CAD is stable, trading at about 1.3880, influenced by mixed signals from the US and unique factors in Canada. The US Bureau of Labor Statistics shows inflation is slowly decreasing but not finished yet. In December, the Consumer Price Index (CPI) rose by 2.7% compared to last year, aligning with market expectations. Core CPI remained at 2.6%, missing forecasts for a slight increase. Month-over-month, overall inflation increased by 0.3%, while core inflation went up by 0.2%, mainly driven by rising shelter costs.

Market Expectations

These results indicate continued disinflation, leading markets to anticipate gradual easing of monetary policy from the Federal Reserve. Currently, there is a 95% chance that the Fed will keep interest rates steady in January. In Canada, the CAD gains strength from rising oil prices, as Canada is a major crude supplier to the US. WTI oil prices have risen for four days straight, now around $61 per barrel, due to supply concerns and geopolitical tensions. The USD shows strength against the Japanese Yen. In this market setting, the interplay between US inflation and oil prices keeps USD/CAD in a consolidation phase, with no strong immediate triggers for movement. Looking back to early 2025, USD/CAD was trading between 1.3880, influenced by US disinflation and rising oil prices. Now, a year later, the pair remains range-bound but lower, near 1.3450. The same core themes continue to evolve without resolving, limiting strong momentum. On the US side, the disinflation we observed throughout 2025 has become more persistent. Recent data from the Bureau of Labor Statistics showed December 2025’s Consumer Price Index at 2.9%, slightly above expectations and complicating the Federal Reserve’s decisions. As a result, markets now predict a 98% chance the Fed will keep rates unchanged at its upcoming meeting.

Opportunities for Traders

Meanwhile, the Canadian dollar is supported by high energy prices, a trend that has intensified over the past year. West Texas Intermediate crude is now steady around $78 a barrel, a significant rise from early 2025 lows. This increase is fueled by OPEC+ supply discipline and ongoing geopolitical issues. This oil strength provides solid support for the Canadian currency, limiting significant USD/CAD gains. This extended period of stability has reduced market volatility, with the Deutsche Bank Currency Volatility Index recently hitting a 52-week low. For options traders, this is a chance to buy options at lower prices since the market may be underestimating the potential for a big price move. Long straddles—options that profit from large movements in either direction—are appealing for contracts expiring in the next six to eight weeks. For those with a specific directional view, fundamentals slightly favor Canadian dollar strength. A careful approach of buying out-of-the-money USD/CAD puts could be a cost-effective way to prepare for a possible drop below the important 1.3400 support level. This strategy would benefit if stubborn US inflation keeps the Fed hawkish longer than expected, triggering a risk-off move. Given the balanced risks, using option collars is a wise way to safeguard currency exposure in the coming weeks. This strategy involves buying a protective put and selling a call option to cover the cost, creating a defined trading range. It allows for participation in small moves while protecting against sharp downturns in the exchange rate. Create your live VT Markets account and start trading now.

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