USD/CAD continued to rise, trading around 1.3750 during Asian hours on Monday. This surge was driven by the US Dollar’s strength amid increased geopolitical tensions, particularly following the US capture of Venezuelan President Nicolas Maduro. US President Donald Trump hinted at military intervention if Venezuela’s interim president does not meet US demands. He also discussed potential actions regarding Colombia, Mexico, and Cuba.

Federal Reserve Rate Cuts Expected

Traders expect two more rate cuts from the Federal Reserve in 2026, according to the December Meeting Minutes from the Federal Open Market Committee. Markets are anxious about the upcoming nomination of a new Fed chair, a decision that could impact interest rates. The Canadian Dollar (CAD) might strengthen if oil prices rise. However, West Texas Intermediate Oil remains stable, trading around $57.20 per barrel. Market reactions to the US attack on Venezuela were varied, considering Venezuela’s low oil production compared to global output. The value of the Canadian Dollar is affected by Bank of Canada interest rates, oil prices, and economic data. Generally, higher oil prices and a strong economy boost the CAD, while weaker data can lower its value. The current situation is driving USD/CAD higher towards 1.3750 due to increased demand for safety. The US dollar is strengthening as tensions escalate in South America. We saw a similar pattern during risk events in 2024 when the VIX index rose above 30. For now, the USD/CAD pair seems likely to continue rising.

Monetary Policy Expectations

Despite the US dollar’s strength, monetary policy expectations present a challenge. Markets anticipate two Federal Reserve rate cuts this year, and a potentially more dovish Fed Chair in May could speed up this process. This creates tension between short-term safe-haven demand and a medium-term outlook for a weaker dollar. This uncertainty suggests volatility will be the key consideration in the weeks to come. We see one-month implied volatility for USD/CAD jumping to over 8.5%, showing the market’s anxiety about dramatic moves in either direction. Using options strategies like straddles or strangles may help capitalize on the anticipated price swings. The oil market also poses uncertainties that could limit gains for the currency pair. While Venezuela produces less than 800,000 barrels daily, any signs of conflict spreading to major producers like Colombia or Mexico could lead to a spike in WTI prices. A rise in oil prices would bolster the commodity-linked Canadian dollar, pushing USD/CAD lower. We should also consider potential policy differences between central banks. Canada’s inflation rate, at 3.1% in late 2025, might prevent the Bank of Canada from cutting rates as aggressively as the US Federal Reserve. This divergence in policy would support the Canadian dollar against the US dollar. Given these mixed signals, making large directional bets seems risky now. Instead, using derivatives to manage risk, such as buying call spreads for a limited upward move, could be a wiser approach. This allows participation in the current upward trend while protecting against sudden reversals due to shifts in the geopolitical or interest rate landscape. Create your live VT Markets account and start trading now.

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