The USD/CAD has dropped below 1.3900 as the US Dollar weakens. This follows President Trump’s tariff threats against EU countries, affecting the market. Oil prices, which are crucial for the Canadian Dollar, have also decreased. WTI Oil is now over 5% lower than last week’s high. Upcoming Canadian consumer inflation data may influence the dollar’s direction.

Bank of Canada Influences

The Canadian Dollar is influenced by the Bank of Canada’s interest rate choices, oil prices, and important economic indicators like inflation and GDP. When interest rates rise, it tends to strengthen the currency by attracting investment, while changes in oil prices directly affect its value. Inflation data plays a role for the CAD since higher inflation may prompt central banks to increase interest rates. Economic indicators, such as employment rates and GDP, also affect the CAD, with stronger numbers likely pushing it higher. The US market will be closed for Martin Luther King Jr. Day, which might shift focus to the Canadian Consumer Price Index. Expectations about December’s inflation rates could influence the Canadian Dollar. Actions by the Bank of Canada, oil prices, and the US economy will be key in determining the CAD’s direction. Reflecting back to 2025, we noted how quickly geopolitical events could push the USD lower and bring USD/CAD below 1.3900. That drop was triggered by unexpected tariff threats, illustrating how news can impact markets rapidly. Currently, markets are pricing in a different political uncertainty, focusing on the new US administration’s ongoing trade policy reviews with major partners.

General US Dollar Weakness

The general weakness of the US Dollar we saw in early 2025 is not the main theme today. The Dollar Index (DXY) remains steady above 104.50 as markets wait for clearer indications from the Federal Reserve and Washington on international trade agreements. This creates a more tense and stagnant environment for the dollar compared to the abrupt selling seen last year. On the Canadian side, the inflation situation has improved significantly since the fear of a -.3% drop in December 2024 discussed in the 2025 analysis. December 2025 data showed Canada’s annual CPI at 2.8%, preventing the Bank of Canada from signaling any immediate interest rate cuts. This difference in monetary policy supports the Canadian Dollar. Oil prices are currently providing a stronger advantage for the loonie than they did in January 2025, when WTI crude fell to about $58 a barrel. Today, WTI is above $74 a barrel, thanks to disciplined OPEC+ production and steady global demand forecasts for the first half of 2026. This higher price for Canada’s main export puts upward pressure on the Canadian Dollar, which was lacking last year. In this context, traders may want to prepare for potential declines in USD/CAD, but should do so cautiously due to the volatility experienced in 2025. Purchasing put options on USD/CAD could be a smart way to bet on a downturn, backed by strong oil prices and a hawkish Bank of Canada. This strategy has defined risk, protecting traders from a sudden rise in the US Dollar if geopolitical tensions increase. For those looking to guard against volatility in either direction, using straddles or strangles could be a sound strategy in the coming weeks. This method allows traders to profit from significant price movements, regardless of direction, making it well-suited to a market balancing strong Canadian fundamentals with unpredictable global political risks. It’s a lesson learned from the sudden market shifts of 2025. Create your live VT Markets account and start trading now.

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