USD/CAD rose to around 1.3645 during Asian trading on Wednesday. The Canadian dollar weakened after softer inflation data and falling crude oil prices.
Statistics Canada said Canada’s CPI inflation cooled to 2.3% year over year in January, down from 2.4% in December. The figure also came in below the 2.4% market forecast. This increased expectations of another Bank of Canada rate cut.
Oil Prices And Geopolitical Tensions
Oil prices slipped as tensions between the US and Iran eased. Iran’s Foreign Minister Abbas Araqchi said both sides agreed on the main “guiding principles” in the nuclear talks, but also stressed that a deal is not close.
Canada is a major oil exporter, and lower oil prices often put pressure on the Canadian dollar. Markets are now watching the FOMC Minutes due later on Wednesday.
The Minutes may offer clues about the Federal Reserve’s next moves on interest rates. If the tone is dovish, the US dollar could weaken in the near term.
In February 2025, markets correctly priced in a Bank of Canada rate cut as inflation fell. The BoC followed with cuts in April and June 2025, which helped lift USD/CAD toward 1.39 by mid-year. Today, the situation looks different.
How The Backdrop Has Changed
Canada’s story has shifted from cooling inflation to more persistent price pressure. Statistics Canada’s latest report for January 2026 showed CPI rising to 2.9%. That is well above last year’s levels and makes near-term BoC rate cuts less likely. This firmer inflation gives the Canadian dollar support that it did not have in early 2025.
Last year, WTI crude prices weakened as geopolitical risks cooled, which weighed on the loonie. Now, crude is holding above $82 a barrel on tighter global supply forecasts for 2026. That strength is a clear tailwind for the commodity-linked CAD, reversing the pattern seen a year ago.
The Federal Reserve was also central last year. By keeping rates steady through 2025, the Fed created a wide policy gap versus the Bank of Canada. Now, with Canadian inflation staying sticky, that gap is expected to narrow. This shift in rate expectations is making the US dollar less attractive compared with the Canadian dollar.
Against this backdrop, USD/CAD appears more likely to drift lower. Traders may consider strategies that benefit from a falling or range-bound pair, such as buying CAD call options or selling out-of-the-money USD call options. These strategies target a possible move toward the 1.3500 support area in the weeks ahead.
A key risk to this view is a stronger-than-expected US economic report that brings back hawkish expectations for the Fed. To manage that risk, a bearish put spread on USD/CAD can help define downside exposure. This approach seeks to profit from a moderate decline while limiting losses if the US dollar rallies unexpectedly.
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