USD/CAD is falling, nearing six-month lows at 1.3642. This decline is due to rising oil prices and a weaker USD, driven by worries about possible Yen intervention. The USD has decreased against the Canadian Dollar for six consecutive days, currently trading around 1.3680, close to its low of 1.3642 seen in December. The market is reacting to concerns about US-Japan intervention, especially after the US Federal Reserve discussed USD-Yen rates with major banks.

Oil Prices Influence

Oil prices are up over 3% due to tensions between the US and Iran, which is supporting the Canadian Dollar since oil is a major export for Canada. Despite threats from Trump about a 100% tariff on Canada, the Loonie is holding strong, although trade relations remain uncertain. This Monday, investors are eyeing US Durable Goods Orders, but the main focus shifts to the monetary policy announcements from the Bank of Canada and the Federal Reserve on Wednesday. Both banks are likely to keep interest rates unchanged as traders assess possible policy differences that could affect the USD/CAD. Central banks aim to keep prices stable, adjusting interest rates to combat inflation or deflation. They operate independently from politics, with policy boards trying to balance inflation control and economic growth through rate changes. The central bank chairman leads meetings, aiming for consensus and clear communication of monetary policy. The USD/CAD pair recently tested six-month lows around 1.3655 late last year, influenced by a weaker US dollar and rising oil prices. This trend has continued into the new year, with the pair trading closer to the 1.34 level. The fundamental pressures building in late 2025 now seem to be strengthening.

Central Bank Divergence

Strong oil prices continue to support the Canadian Dollar, as last year’s supply concerns keep prices high. West Texas Intermediate (WTI) crude has stayed above $82 a barrel, and recent EIA reports show a substantial drop in U.S. crude inventories. This makes betting against the Loonie difficult for now. The gap in central bank policies is clearer than it was last year. Canada’s recent inflation report for December 2025 showed a persistent reading of 2.8%, while the Federal Reserve’s preferred measure in the US softened to 2.6%. As a result, markets are anticipating a more aggressive rate-cutting cycle from the Federal Reserve compared to the Bank of Canada. For derivative traders, this suggests positioning for further declines in USD/CAD. Implied volatility is rising, making put options a good choice for capitalizing on a possible break below the recent 1.3400 support level. Purchasing March puts with a strike price around 1.3350 could provide a defined-risk approach to benefit from continued Canadian dollar strength. Traders might also consider put spreads to lower the trade’s initial cost, given the increased volatility. For instance, buying a March 1.3400 put while selling a March 1.3250 put can reduce the entry cost for a moderately bearish outlook. It’s essential to closely watch the risk of a sudden US dollar rally, especially if Yen intervention fears, highlighted in 2025, come into play. Create your live VT Markets account and start trading now.

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