Oil Price Influence

The price of West Texas Intermediate (WTI) oil has dropped to about $59.30 per barrel after recent gains. Rising tensions between the US and EU may hurt global oil demand, which affects crude oil prices. The US Dollar and Canadian Dollar (USD/CAD) may not see significant gains due to challenges from the US-Greenland issue. After Trump’s tariff announcement, the European Union is considering retaliatory actions to prevent potential duties. Recent US labor data have pushed back expectations for Federal Reserve rate cuts to June 2026. Fed officials are not in a hurry to ease unless there is clear evidence of inflation, leading Morgan Stanley to adjust their rate cut predictions. The value of the Canadian Dollar is influenced by factors such as Bank of Canada interest rates, oil prices, economic health, inflation, and trade balance with imports. Economic indicators like GDP and employment also play a role in CAD valuation.

Volatility and Market Outlook

The upcoming tariff deadline on February 1st is a key source of potential market volatility. The CBOE/CME FX Volatility Index for the Canadian Dollar (CVOL) has risen to 8.5, the highest it’s been in three months, indicating market nerves. Traders should brace for sharp price movements and consider using options to manage risks related to possible tariff actions. Oil prices are a significant weak spot for the loonie. WTI is struggling to stay above $60 per barrel. The latest report from the Energy Information Administration (EIA) revealed a surprising rise in US crude inventories last week. Any increase in trade tensions between the US and EU will likely hurt global demand. Since Canada relies heavily on oil exports, this puts a cap on the potential strength of the Canadian Dollar. The growing gap between central bank policies is providing support for USD/CAD. While US labor data have pushed back expectations for a Federal Reserve rate cut, Canada’s inflation rate for December 2025 came in at a lower-than-expected 1.9%, allowing the Bank of Canada to adopt a more cautious stance. This situation favors a stronger US Dollar compared to the Canadian Dollar. We saw how market headlines influenced trading during the intensified trade disputes in 2025 and earlier. Then, commodity currencies were highly sensitive to sudden moves from political news. We expect a similar trend now, where technical levels may not hold steady and traders must be ready for unpredictable price movements. Given these dynamics, taking a bullish position on USD/CAD looks promising for the next few weeks. A long position in USD/CAD futures or purchasing call options with a March expiration and a strike price near 1.4000 could take advantage of a potential price breakout. This strategy allows for upside exposure while managing risk in a likely unpredictable market. Create your live VT Markets account and start trading now.

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