The USD/CAD currency pair is weakening as the Canadian Dollar gains strength from rising oil prices. The pair is currently around 1.3900 and has ended a four-day winning streak, thanks to increases in commodity prices, particularly because Canada is a major crude oil exporter to the US. West Texas Intermediate oil prices have climbed to about $59.40 per barrel due to positive economic data from China. China’s industrial production grew by 5.2% year-over-year in December, and its GDP increased by 1.2% in Q4 2025. This growth was better than expected, even though the annual growth rate eased from 4.8% to 4.5%.

Challenges for Oil Price Increases

Possible obstacles to further oil price rises include reduced tensions with Iran, as US President Trump mentioned he might delay military actions. Despite this, geopolitical risks remain; Trump has warned of potential forceful measures if certain conditions return. The USD/CAD could bounce back if the US Dollar strengthens, typically driven by strong US labor data that could push back expectations for a Federal Reserve interest rate cut until June. The Fed is wary of easing its policy until there is clear evidence of inflation. Market sentiment, US economic conditions, and oil prices are also important for the Canadian Dollar. Generally, higher interest rates and oil prices support the CAD, whereas weak economic data can cause it to lose value. The recent dip in USD/CAD to around 1.3900 highlights the strength of the Canadian Dollar. This is closely linked to rising WTI crude prices, which have increased over 4% this month, currently trading around $61.50 per barrel—a six-month high. This reflects Canada’s position as a key oil exporter to the US.

Factors Affecting Oil Demand

Oil demand looks strong, bolstered by solid Chinese economic data from late 2025. China’s industrial production outperformed expectations in December, and this positive trend seems to be continuing into the new year. Furthermore, OPEC+ has confirmed it will maintain production cuts, and shipping disruptions in the Red Sea are raising supply concerns. However, we must keep in mind the underlying strength of the US Dollar, which could limit further gains for the CAD. Strong US labor market data from late last year has pushed expectations for a Federal Reserve rate cut to at least June 2026. Recent US inflation data for December was also slightly higher than anticipated, leading the Fed to maintain a cautious approach to easing. From our perspective, the central banks are in a key competition, with Canada’s domestic economic situation aiding its currency. Canada’s inflation for December 2025 was stubbornly high at 3.5%, which surprised the market and lowered the chances of an early rate cut by the Bank of Canada. This differing policy path—where the BoC may need to stay hawkish longer than expected—supports the CAD. For derivative traders, this creates a complex but tradeable situation in the coming weeks. Current momentum favors CAD strength, suggesting that short-dated call options on the CAD or put options on USD/CAD could be effective. Given the mixed long-term signals from the Fed, we might also see increased volatility, making strategies like straddles appealing for those anticipating significant price movement in either direction as spring approaches. Create your live VT Markets account and start trading now.

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