USD/CAD was little changed at about 1.3690 in Asian trading on Wednesday, after small gains in the prior session. Traders are cautious before policy decisions from the Federal Reserve and the Bank of Canada later in the day. Markets expect the Federal Reserve to keep its benchmark rate unchanged in the 3.50%–3.75% range for March, based on the CME FedWatch Tool. Attention is on Jerome Powell’s guidance, including how higher oil prices could affect the policy outlook amid economic and geopolitical uncertainty.

Bank Of Canada Rate Expectations

For Canada, Rabobank expects the Bank of Canada to hold its overnight rate at 2.25% at the meeting and to keep it there through year-end. This view matches the Bloomberg survey consensus and is fully priced in, even as inflation persists and growth slows, while markets also price a possible rate rise. The pair may stay supported as the Canadian Dollar faces pressure from softer oil, with WTI near $94.00 per barrel. Oil could regain support if tensions around the Strait of Hormuz rise, with the US reporting strikes on Iranian coastal sites, and reports that Israel claimed strikes that killed Ali Larijani and Basij chief Gholamreza Soleimani. We are looking back at the market mood from March 2025, when caution dominated ahead of central bank decisions with USD/CAD hovering near 1.3690. At that time, traders were focused on how oil price surges and geopolitical conflict would shape policy. Both the Federal Reserve and the Bank of Canada were expected to hold rates steady, a familiar pause in a period of uncertainty. Fast forward to today, March 18, 2026, and the landscape has evolved significantly, creating a clear policy divergence. The Fed funds rate is now at 4.75%-5.00% after recent data showed stubbornly high US inflation at 3.4% and another strong jobs report adding 265,000 positions last month. This data supports a stronger US Dollar, as markets are now pricing in less than a 50% chance of a rate cut before the third quarter.

Policy Divergence Trade Implications

Conversely, the Bank of Canada, with its policy rate at 3.50%, faces a different picture. Canada’s latest CPI reading came in at 2.9%, continuing its downward trend and falling within the bank’s target range, while recent housing start figures showed a notable decline. This economic softness suggests the BoC may have to consider easing policy sooner than the Fed, putting downward pressure on the Canadian dollar. The oil market dynamic has also shifted from what we saw in 2025 when WTI was trading near $94 amid tensions in the Strait of Hormuz. Today, WTI crude is trading closer to $85 per barrel after the latest Energy Information Administration (EIA) report showed a surprise build in US inventories, weighing on prices. This relative softness in the oil market removes a key pillar of support for the loonie that was present last year. Given this widening gap in economic performance and monetary policy, derivative traders should consider positions that profit from further USD/CAD strength. Buying USD/CAD call options with expirations in the coming months offers a way to capture potential upside while defining risk. Implied volatility may rise ahead of upcoming central bank meetings, making now a good time to establish such positions. Another strategy is to use bull call spreads on USD/CAD to cheapen the cost of a bullish directional bet. The interest rate differential between the US and Canada, which we see has now widened to over 125 basis points, provides a strong fundamental tailwind for this trade. This carry trade advantage makes holding long USD positions against the CAD increasingly attractive for the medium term. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account