USD/CAD stabilizes around 1.3800 as tensions between the US and Europe relax. This follows President Trump securing a NATO framework agreement, though exact details are still unclear. Oil prices are increasing, partly because Saudi Aramco’s CEO dismissed concerns about oversupply, highlighting strong demand from emerging markets. The USD/CAD pair ends a four-day drop, trading near 1.3790 during European hours as the US Dollar starts to recover.

US-NATO Deal Details

The new US-NATO deal may touch on mineral rights and missile placements, but specifics are still coming to light. Additionally, the US annual core PCE Price Index, a key measure of inflation, rose by 2.8% in November. Higher oil prices could support the Canadian Dollar since Canada is the largest crude oil exporter to the US. West Texas Intermediate Oil prices have bounced back after dropping over 2%, now trading around $59.60 per barrel. Several factors affect the Canadian Dollar, including the Bank of Canada’s interest rates and oil prices. Economic indicators such as GDP and employment data also play a role. Typically, higher inflation leads to interest rate hikes, increasing demand for the Canadian Dollar. The market dynamics have changed since we saw a 95% chance of a rate cut in late 2025. The Federal Reserve followed through with a 25-basis-point cut in December, and we are now assessing the results. This has put the US Dollar under pressure in early 2026.

Canadian Dollar Gains Strength

The Canadian Dollar is gaining strength, partly due to rising oil prices. West Texas Intermediate, which was under $60 a barrel last year, is now stable above $65. This strength is backed by new data showing that global oil demand in 2025 exceeded expectations, especially from Asia. We must also consider the differing central bank policies affecting the USD/CAD pair. While the Fed relaxed its stance, the Bank of Canada kept its key interest rate steady this month, supported by strong employment figures. This narrowing interest rate gap makes holding Canadian Dollars more appealing than it was a few months ago. Looking back, the November 2025 core PCE reading of 2.8% was crucial in the Fed’s decision to cut rates. Recent December data indicated a slight dip in inflation to 2.7%, which suggests the Fed might pause for the next quarter. This indicates that the US Dollar may lack a strong reason to appreciate soon. In the coming weeks, this environment could lead to further strength for the Canadian Dollar against the US Dollar, currently near 1.3550. We might explore strategies that profit from a declining or stable USD/CAD, such as buying puts on the pair. Selling out-of-the-money calls could also work if we anticipate the pair will stay below the 1.3800 level seen last year. Create your live VT Markets account and start trading now.

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