### Recent Declines in Oil Prices The Canadian Dollar (CAD) is affected by several factors, including Bank of Canada interest rates, oil prices, the country’s economic health, inflation, trade balance, and the state of the U.S. economy. Changes in interest rates set by the Bank of Canada directly influence the CAD; when rates rise, the currency typically strengthens. Oil prices play a vital role because Canada exports a lot of oil. High inflation often leads to rate hikes, making CAD more attractive. Economic indicators like GDP and employment also greatly impact the CAD’s value. The outlook for the USD/CAD exchange rate is likely to continue its downward path into early 2026, as it hovers around the 1.3770 mark. The main reason for this is the differing policy approaches between a weakening U.S. Federal Reserve and a more determined Bank of Canada. This situation suggests that strategies favoring a stronger Canadian dollar, like purchasing put options on the USD/CAD pair, may be wise in the next few weeks. The Fed’s cautious position has been backed by recent data. The U.S. Consumer Price Index for November 2025 was lower than anticipated, coming in at 2.8% year-over-year. This has increased market expectations, with federal funds futures indicating a greater than 70% chance of a rate cut by the end of the first quarter of 2026. This trend continues to pressure the value of the U.S. dollar. ### Canada’s Economy Shows Persistence On the other hand, Canada’s economy is showing resilience. The latest Labour Force Survey revealed that the country added an impressive 45,000 jobs last month. This strong employment number gives the Bank of Canada less reason to indicate upcoming rate cuts, making the Canadian dollar relatively more appealing. We believe the policy difference between the two central banks will be the key theme for the currency pair. A significant risk to this outlook comes from recent drops in crude oil prices, which could hurt the commodity-linked loonie. WTI crude oil has struggled to stay above $75 per barrel, a significant decrease from earlier highs in 2025. This could limit the Canadian dollar’s rise and introduce volatility, making risk-defined options strategies, like put spreads, a better choice than directly shorting futures. Looking back at the 2014-2016 period, we see how a sharp drop in oil prices can severely pressure the Canadian dollar, often outweighing other influences. This history indicates that while the differing policies of central banks are influential, a sustained downturn in energy markets can still restrict the loonie’s strength. Therefore, traders should closely monitor upcoming oil inventory data and OPEC+ announcements. Create your live VT Markets account and start trading now.

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