USD/CAD rose above 1.3750, reaching monthly highs and heading for a 0.5% weekly gain. The Canadian dollar fell for a fourth straight day, with the pair trading in the mid-1.3700s.
The US dollar strengthened as markets moved into risk-off mode and US Treasury yields rose. Expectations for Federal Reserve rate increases supported the move.
A meeting between Donald Trump and Xi Jinping added support for the US dollar, despite no detailed agreements. The meeting took place with Iran and Taiwan among the issues in the background.
US inflation data and Retail Sales increased rate-hike expectations. The CME FedWatch Tool priced a nearly 50% chance of at least one hike by year-end, up from under 15% a week earlier.
Markets awaited Canada’s March Manufacturing Sales and April Housing Starts. In the US, the NY Empire State Manufacturing Index and Industrial Production were due later.
The Canadian dollar is influenced by Bank of Canada rates, oil prices, inflation, the trade balance, and market sentiment. It is also affected by US economic conditions, as the US is Canada’s largest trading partner.
Looking back to this time in 2025, we saw USD/CAD climb above 1.3750 as bets on US Federal Reserve rate hikes intensified. That move was a classic risk-off rally, fueled by strong US inflation figures that now seem like a distant memory. The market’s focus has clearly shifted one year later.
Today, the tables have turned slightly, as we are now watching a potential policy divergence between the central banks. While US inflation has cooled to 2.9%, the Federal Reserve remains hesitant to signal any rate cuts. In contrast, with Canadian CPI now at 2.5%, the Bank of Canada may be positioned to cut rates as early as July, creating a tailwind for USD/CAD.
The price of oil is acting as a floor for the Canadian dollar, preventing a more significant decline. With WTI crude holding steady above $82 per barrel, Canadian export revenues are providing fundamental support to the currency. This creates a challenging push-and-pull for the pair, where monetary policy outlook weighs against strong commodity prices.
For derivative traders, this environment suggests that positioning for a potential breakout in volatility could be prudent. We see opportunity in using options to express a view, as the conflicting signals from interest rate differentials and oil prices could lead to sharp moves. A long strangle, buying both an out-of-the-money call and put option, could capitalize on a significant price swing in either direction over the next several weeks.
