USD/CAD rose for a fifth straight day and traded near 1.3676. The pair moved higher after softer Canadian inflation data weakened the Canadian Dollar. Canada’s CPI was 0.0% month-on-month in January versus a 0.1% forecast, and 2.3% year-on-year versus 2.4% expected.
BoC Core CPI rose 0.2% MoM in January after falling 0.4% in December. The annual core rate eased to 2.6% from 2.8%. The Bank of Canada targets 2% inflation and uses a 1–3% control band. It now expects CPI to average 2.0% in 2026 (previously 2.1%) and 2.1% in 2027.
Canadian Inflation And Oil Weigh On The Loonie
Oil prices also pressured the currency because Canada is a major crude exporter. WTI traded near $62.35, down about 1.95%, after a second round of US-Iran nuclear talks in Geneva.
The US Dollar also strengthened. The DXY traded near 97.34, up about 0.25%. US data showed the Empire State Manufacturing Index at 7.1 in February (forecast 6; prior 7.7) and the ADP Employment Change four-week average at 10.3K (revised prior 7.8K).
Markets are watching the FOMC minutes on Wednesday. On Friday, the focus turns to Core PCE inflation and the advance Q4 GDP estimate.
A year ago, in early 2025, the Canadian dollar was weakening amid soft inflation and falling oil prices. At the time, Canadian CPI was only 2.3% year-over-year. That gave the Bank of Canada room to stay on hold. Today, the picture is very different.
Over the past twelve months, conditions have shifted sharply. The January 2026 data shows Canadian inflation has risen to 2.9%. That surprised many investors and increased pressure on the Bank of Canada to keep policy restrictive. This is a clear break from the disinflation trend seen at this time last year.
Shifting Policy Divergence And Volatility Outlook
Oil, a key driver of the loonie, has also strengthened. WTI now trades above $80 a barrel, far above the $62 level seen in February 2025, when the possibility of a US-Iran deal weighed on prices. Higher energy prices now support the Canadian dollar in a way they did not a year ago.
On the other side, the US dollar remains strong. The DXY is near 104.5, well above the 97 level from last year. US inflation has also stayed firm, with January 2026 reading 3.1%. As a result, markets have pushed back expectations for Federal Reserve rate cuts. This creates a complicated setup: the Fed is still hawkish, while the BoC faces renewed inflation pressure.
With these forces pulling in different directions, volatility in USD/CAD may rise in the coming weeks. Strong Canadian inflation and high oil prices point to a lower USD/CAD, but broad US dollar strength remains a major offset. Derivatives traders may want to consider strategies that benefit from larger price swings, such as long-volatility options positions.
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