The USD/CAD currency pair has dropped for the second day in a row, sitting at around 1.3660, close to a five-month low of 1.3642. This drop is mainly due to rising oil prices, which are helping the Canadian Dollar, as Canada is the largest crude exporter to the US. Oil prices have rebounded, with West Texas Intermediate at about $57.20. This rise is linked to growing tensions in the Middle East, particularly from Saudi airstrikes in Yemen and Iran’s strong opposition to the US, Europe, and Israel. These factors are raising concerns about oil supply, pushing crude prices higher.

The US Dollar Weakens

The US Dollar is losing strength, partly because traders expect the Federal Reserve to lower interest rates again in 2026. They are eagerly awaiting the FOMC’s December Meeting Minutes for further details. The Fed recently cut interest rates by 25 basis points, making a total cut of 75 bps in 2025. The CME FedWatch tool shows an 81.7% chance that interest rates will stay the same at the Fed’s January meeting. In contrast, the chance of a 25-basis-point rate cut has dropped to 18.3%. Several factors affect the Canadian Dollar (CAD), including the Bank of Canada’s interest rates, oil prices, economic performance, and inflation. Additionally, market sentiment and the overall health of the US economy also impact the CAD. As we near the end of 2025, the USD/CAD pair is reaching significant lows not seen in five months. The main reasons for this are clear: rising oil prices are helping the Canadian dollar, while expectations of a softer Federal Reserve are putting pressure on the US dollar. This trend creates both opportunities and risks for the weeks ahead.

Factors Influencing Oil Prices

The strength of crude oil plays a big role, with West Texas Intermediate trading at about $57 a barrel amid increasing geopolitical tensions in the Middle East. Recent reports from the U.S. Energy Information Administration (EIA) show consistent declines in crude inventories over the past month, further supporting higher prices. Given Canada’s status as a major energy exporter, rising oil prices are a boost for the Canadian dollar. Therefore, anyone looking to trade a stronger USD against the CAD may face challenges. On the other hand, the US dollar is weakening due to the Federal Reserve’s actions throughout 2025. This year, the Fed has already implemented 75 basis points in rate cuts, responding to a slowing US labor market. November’s non-farm payroll report indicated much lower job growth. The market is now considering the possibility of two more cuts in 2026, suggesting a likely downward path for the greenback. For traders in derivatives, this market environment favors strategies that profit from a continued drop in USD/CAD. Buying put options on the pair could provide good leverage, especially if it breaks below the 1.3642 support level. A more conservative approach could involve selling out-of-the-money call spreads, which would generate income from premiums if the pair remains under a certain resistance level. However, keep an eye out for possible reversals as we enter January 2026. The upcoming Federal Open Market Committee meeting minutes could show a more divided or cautious viewpoint than the market expects, potentially strengthening the US dollar. Additionally, any easing of tensions in the Middle East could quickly reverse the recent rise in oil prices, weakening a key support for the Canadian dollar. Create your live VT Markets account and start trading now.

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