The Canadian Dollar recently hit a weekly high against the US Dollar, driven by worries over the trade war during President Trump’s time in office. According to a Bank of Canada survey, while businesses in Canada are cautious, concerns about a recession are easing. The Canadian Consumer Price Index (CPI) showed annual inflation at 2.4%, but monthly figures dipped by 0.2%.

Canadian Economic Outlook

European leaders have rejected Trump’s potential tariffs against the EU, which are linked to Greenland’s cession. This could lead to retaliatory tariffs on US goods. Canadian companies are struggling with low sales due to trade tensions with the US but expect slight growth by 2026. The Canadian Dollar is facing challenges from moving averages but could gain if economic conditions remain steady. Its value is affected by Bank of Canada interest rates, oil prices, overall economic health, and the trade balance. The strength of the US economy, which is Canada’s main trading partner, also plays a significant role. Economic data plays a crucial part in determining the CAD’s value. Positive indicators, like GDP and employment numbers, can boost the Dollar by attracting foreign investment and supporting possible interest rate increases from the Bank of Canada. On the other hand, weak data may drag down the Canadian Dollar. The US Dollar has weakened significantly due to renewed trade tensions with the European Union over Greenland. This geopolitical risk is currently boosting the Canadian Dollar. We’re particularly focused on the USD/CAD currency pair, which is testing the 1.3900 level.

Crude Oil Prices and Foreign Investment

Recent reports show that WTI crude oil prices have risen by 4% this past week, surpassing $85 a barrel for the first time since the Q3 2025 sell-off. This supports the Loonie, as oil is Canada’s largest export. Additionally, data released last Friday indicated that foreign investment in Canadian securities reached a six-month high, reflecting growing confidence. The Bank of Canada is likely to stay put, especially since December’s annual inflation rate was a solid 2.4%. This is comfortably within their target range, reducing immediate pressure to cut interest rates. Such policy stability provides a solid foundation for the Canadian Dollar against a fluctuating US Dollar. We think that using options strategies makes sense in this environment, especially buying USD/CAD put options to take advantage of potential declines. With President Trump’s February 1st tariff deadline approaching, we expect implied volatility to increase. This makes strategies benefiting from price swings, like long straddles, worth considering if you anticipate sharp changes. It’s important to remember the rapid market changes we saw during the 2025 trade disputes, similar to the unpredictable swings from the earlier US-China trade war. A sudden easing of tensions from the White House could lead to a strong rally for the US Dollar. Therefore, we’re monitoring the 200-day moving average as a crucial support level for any bearish positions on the CAD. Create your live VT Markets account and start trading now.

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