USD/CAD is hovering around 1.3700 after rising for two days, fueled by a cautious market worried about an AI bubble. The falling oil prices are impacting the Canadian Dollar since it closely tracks commodity values. The US Dollar is up for the second consecutive day against the Canadian Dollar. Currently at 1.3685, the USD is benefiting from the cautious market, even though it failed to break through the 1.3700 mark earlier. Disappointing results from major US tech companies, including Google’s Alphabet, are dragging down stock markets globally. European markets have slight losses, and Wall Street futures point to a mixed start. New US economic data presents mixed signals. The ISM Services PMI indicates strong business activity, but worries about the labor market arise from a weak ADP employment report. Thursday’s Jobless Claims and JOLTS Job Openings figures will be closely watched. In Canada, economic data is light, and the falling oil prices continue to weigh on the Canadian Dollar. US WTI crude prices have slightly bounced back from their weekly lows but are still more than $2 below last week’s highs, influenced by reducing tensions between the US and Iran. In financial markets, “risk-on” indicates optimism, boosting commodity-exporting currencies. Conversely, “risk-off” supports safe-haven currencies like the US Dollar, Japanese Yen, and Swiss Franc. Looking back to early 2025, there was a strong risk-off sentiment pushing USD/CAD toward the 1.3700 level due to fears of an AI-driven tech bubble and disappointing earnings from major companies. The US Dollar gained strength as a safe-haven asset while the Canadian Dollar suffered from falling oil prices. However, the situation has changed significantly since then. The tech sector has shown resilience, with the NASDAQ 100 recovering from its dip to close last year up over 20%. Current market volatility, measured by the VIX index, is around 14, indicating far less investor anxiety than during last year’s peak fear. The challenges facing the Canadian Dollar have lessened. WTI crude oil prices have risen from below $66 during those tensions in early 2025 and are now consistently above $80 per barrel, supported by strong global demand forecasts for 2026. This creates a more solid foundation for the loonie. The outlook for the US Dollar has also changed. In the latter half of 2025, the Federal Reserve made two small rate cuts as inflation eased. This shift in monetary policy has diminished the dollar’s yield advantage over other currencies, including the CAD. Additionally, US Jobless Claims have slightly increased lately, with the latest four-week average at 225,000, signaling a softening labor market. Given these developments, we should view any rise in USD/CAD as a chance to favor the Canadian Dollar. The factors that pushed the pair to 1.3700 last year have mostly reversed. We might consider buying CAD calls or employing put spreads on USD/CAD to benefit from a potential decrease, as the risk-reward now leans away from the upside.

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