USD/CAD rose on Tuesday and traded near 1.3760 at the time of writing, up 0.17% on the day. The move came as the Canadian Dollar did not gain much support from Oil, even with WTI at $102.70, up 0.60%.
Canada’s inflation increased in April, with CPI rising 2.8% year-on-year versus 2.4% previously, slightly below forecasts. Month-on-month CPI rose 0.4%.
Bank Of Canada Core Inflation Eases
The Bank of Canada’s core CPI eased to 2.1% year-on-year from 2.5%. This pointed to slower underlying price growth even as headline inflation moved higher.
The US Dollar stayed firm amid demand for safe-haven assets linked to geopolitical tensions involving Iran. Reports of explosions on Iran’s Qeshm Island and concerns about reduced traffic through the Strait of Hormuz raised worries about energy supply.
US data also supported the Dollar, with ADP Employment Change showing private employers added an average of 42.25K jobs per week in early May, up from 33K. Together with a stronger USD and Canada’s mixed inflation data, USD/CAD kept upward pressure.
We recall the situation in 2025 when mixed inflation data kept the Bank of Canada’s path uncertain. Today, with the BoC now widely expected to begin cutting its policy rate from 5.0% in the coming months, the dynamic has shifted significantly. This policy divergence with the Federal Reserve, which is holding rates steady, suggests a clear path for the US dollar to strengthen against the loonie.
Oil Tailwind For Cad Weakens
The support from high energy prices we saw in 2025, with WTI trading over $100, has also faded. We are now seeing West Texas Intermediate hover around $79 a barrel, offering less of a buffer for the Canadian dollar. This removes a key pillar of support that previously helped limit CAD weakness.
Given this outlook, we are positioning for continued upward movement in USD/CAD. Buying call options on USD/CAD with expiry dates in the next three to six months could be an effective strategy to capitalize on the expected policy divergence. This allows traders to benefit from a rising exchange rate while limiting downside risk.
While last year we saw robust US hiring data, recent reports like April’s Non-Farm Payrolls showed a more moderate 175,000 jobs added. Despite this cooling, US inflation remains stickier at 3.4%, giving the Federal Reserve less reason to cut rates compared to its Canadian counterpart. This relative economic strength continues to favor the greenback.
