The US Dollar has weakened against the Canadian Dollar over the last two days, with the exchange rate falling about 0.6%. It dropped from a high of 1.3928 to current lows around 1.3820.

Geopolitical Influences

Geopolitical tensions are likely to impact the market, especially as US traders return after Martin Luther King Jr. Memorial Day. Canada’s recent data shows its Consumer Price Index (CPI) rose by 2.4% in December, which is higher than expected. However, the Bank of Canada’s preferred measure – the BoC CPI – has eased slightly. Several factors influence the Canadian Dollar. These include the Bank of Canada’s interest rates, oil prices, and the overall health of Canada’s economy. Market sentiment and the US economy are also important. When interest rates and oil prices are higher, the Canadian Dollar (CAD) tends to strengthen. On the other hand, negative economic data can weaken it. Key economic indicators like GDP growth and employment data play a significant role in determining the value of the CAD. A strong economy can attract foreign investments and encourage the Bank of Canada to increase interest rates, boosting the CAD. Conversely, weak economic data may harm the dollar’s strength. Last year, in January 2025, the US Dollar was weakening due to geopolitical tensions and plans for increased trade tariffs. This pushed the USD/CAD exchange rate down from highs near 1.3928 toward the 1.3800 level. At that time, strong Canadian inflation data also helped strengthen the CAD.

Market Strategy and Data

In January 2026, the situation is quite different, indicating a change in strategy. The Federal Reserve has adopted a more aggressive approach. Recent Non-Farm Payroll data for December 2025 showed strong job growth of over 250,000, leading to increased expectations for rate hikes. In contrast, the Bank of Canada is dealing with softer domestic data, including a recent report showing Q4 2025 GDP growth at just 0.8%, below expectations. This growing difference between the US and Canadian economies is creating an upward trend for the USD/CAD pair. WTI crude oil prices have also recently dropped below $75 a barrel, which is putting additional pressure on the commodity-linked CAD. For derivative traders, this suggests positioning for a stronger US dollar against the Canadian dollar. Given this outlook, buying call options on USD/CAD may be a smart decision for gaining upside exposure while managing risk. With expected volatility increasing, options expiring in the next 30 to 60 days could allow time for this economic divergence to unfold. Strategies that benefit from a rising USD/CAD, such as bull call spreads, should be considered to take advantage of the anticipated upward movement. Create your live VT Markets account and start trading now.

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