USD/CAD slipped to around 1.3695 in Asian trading on Thursday. Higher crude oil prices supported the Canadian dollar, as Canada is a major oil exporter. Oil prices climbed on ongoing tension between the US and Iran.
Canada’s CPI inflation eased to 2.3% year over year in January, down from 2.4% in December, according to Statistics Canada data released Tuesday. The figure missed the 2.4% market forecast, which increased expectations of another Bank of Canada rate cut.
Market Drivers In Focus
The US dollar found support from the January Federal Open Market Committee minutes. Several policymakers said rates may need to rise if inflation stays high.
On Friday, markets will watch the preliminary US Q4 GDP reading, along with the PCE Price Index and S&P Global PMI data. These releases may drive near-term moves in USD/CAD.
Looking back to early 2025, a key divergence began to form between the US and Canada. Softer Canadian inflation was already pointing to Bank of Canada (BoC) rate cuts, while the Federal Reserve kept a hawkish tone. This policy split has shaped trading for the past year.
That view proved accurate. The BoC started cutting rates in mid-2025 and has lowered its policy rate to 3.75%. January 2026 inflation data showed CPI at 2.1%, supporting the case that the BoC still has room to ease. This has continued to weigh on the Canadian dollar.
Policy Divergence And Trading Implications
In the US, inflation has been more persistent. The Federal Reserve has kept rates steady at a higher level, as core PCE inflation printed at 2.8% for January 2026, still above target. This has widened the rate gap between the US and Canada, making the US dollar more attractive.
This gap has generally pushed USD/CAD higher over the past 12 months, lifting it from the 1.3700 area toward 1.3900. At the same time, strong oil prices have helped support the Canadian dollar, with WTI crude trading above $85 a barrel. These forces—higher US rates versus strong energy prices—are keeping the pair in a tight balance.
In the coming weeks, selling volatility in USD/CAD could be a possible strategy. With strong but offsetting drivers, the pair may stay in a range. Traders could look at selling strangles, which means selling an out-of-the-money call and an out-of-the-money put to collect premium, and profiting if the pair does not move sharply.
If oil volatility rises, buying options can offer defined risk for a directional view. If a trader expects a further jump in energy prices to strengthen the loonie, they could buy USD/CAD put options. If they expect the rate gap to outweigh oil, buying call options may fit that view.
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