USD/CAD has hit a seven-month peak at 1.4119, largely due to falling crude oil prices. The Canadian Dollar weakened as oil prices dropped, prompted by a significant rise in US oil inventories. The USD/CAD pair is on the rise, trading around 1.4110 in Asian markets, while the commodity-dependent Canadian Dollar struggles. West Texas Intermediate oil prices have fallen for a third day, sitting close to $60.00 per barrel after US inventories increased by 6.5 million barrels, much higher than the expected 2.4 million barrel drop.

US Government Shutdown Impact

The US Dollar is facing pressure from an ongoing government shutdown that has lasted six weeks. Recent attempts to pass short-term funding have failed, risking the longest shutdown in US history. The USD received some support from the cautious policy stance of the US Federal Reserve for December. Fed Chair Jerome Powell indicated uncertainty about another rate cut, suggesting a wait-and-see approach until new data comes in. The Canadian Dollar’s value is impacted by the Bank of Canada’s interest rates, oil prices, economic condition, inflation, and trade balances. Since oil is Canada’s biggest export, changes in oil prices significantly influence the CAD’s value; thus, higher oil prices are generally positive for the CAD. Currently, with USD/CAD trading around 1.3950, we notice similarities to past instances of Canadian Dollar weakness. The main factor is the low crude oil prices, with West Texas Intermediate struggling to stay above $72 per barrel. Last week’s EIA report revealed an unexpected inventory increase of 4.2 million barrels, raising concerns about a supply surplus into 2026.

Market Expectations and Strategies

The loonie faces additional pressure from slowing global demand forecasts, which hit Canada hard as a major energy exporter. For traders, this highlights the fundamental weakness of the CAD compared to the US Dollar. The market is adjusting for this divergence, expecting it to persist until the year’s end. We recall a similar scenario from years ago when a spike in US inventories pushed the pair past 1.4100. That time, uncertainty in the US played a role, but weakness in oil was the main influence on the pair. History indicates that as long as crude oil remains under pressure, the USD/CAD will likely keep rising. In contrast, the US Dollar gets support from a hawkish Federal Reserve. Recent US CPI data came in slightly above expectations at 3.4%, making further rate hikes possible in early 2026. This stands in contrast to the Bank of Canada, which is expected to maintain steady rates, widening the gap in monetary policies between the two countries. Given this outlook, purchasing call options on USD/CAD appears to be a smart strategy to capture potential gains. We’re considering strikes around 1.4050 with expirations in January 2026 to allow enough time for the trend to develop, offering a low-risk opportunity to profit if the pair continues to rise. For those looking to earn premiums while maintaining a bullish-to-neutral stance, selling cash-secured puts with a strike price around 1.3700 might be appealing. This method takes advantage of time decay and volatility if the pair remains above that level. Alternatively, traders can express a direct view on oil by buying puts on WTI futures, wagering on a decline below $70. Create your live VT Markets account and start trading now.

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