USD/CAD was nearly flat on Tuesday. The pair traded near 1.3705 after an intraday high around 1.3725. A stronger US Dollar kept the Canadian Dollar under mild pressure. Last week, the US Supreme Court ruled that President Donald Trump’s use of the International Emergency Economic Powers Act to impose broad tariffs was unlawful. After that decision, Trump invoked Section 122 of the Trade Act of 1974. He announced a temporary 10% flat tariff on imports from all countries, effective Tuesday.

Fed Outlook And Dollar Support

Lower expectations for near-term Federal Reserve rate cuts supported the US Dollar. This followed slower fourth-quarter GDP growth and firm PCE inflation. Chicago Fed President Austan Goolsbee said he still sees room for more cuts this year. However, he wants clearer evidence that inflation is moving back to the 2% target. The ADP Employment Change four-week average rose to 12.8K from 11.5K. Conference Board Consumer Confidence climbed to 91.2, above the 87.1 forecast. It also rose from 84.5, which was revised up to 89. Markets will watch Trump’s State of the Union address on Wednesday for more details on trade policy. In Canada, the key release is fourth-quarter annualised GDP on Friday. There is little else on the calendar. WTI crude traded around $65.80, down about 0.90%. It pulled back from its highest level since August 2025. US-Iran tensions added swings to oil prices, which often influence the Canadian Dollar.

Trade Tariffs And Volatility Strategies

We view the new 10% flat US tariff as a major market shock. It may keep the US Dollar firm due to safe-haven demand. The policy adds uncertainty not seen since the trade disputes of the late 2010s, a period that often supported the greenback. For derivative traders, this backdrop points to a bullish USD bias versus major trading partners like Canada. The gap between the Federal Reserve and the Bank of Canada is widening. Recent US inflation data, with Core PCE at 2.9% last month, gives the Fed little reason to cut rates. At the same time, US tariffs directly threaten Canadian exports and growth. We are now pricing in a higher chance of a Bank of Canada rate cut by the third quarter of this year. This divergence should continue to support USD/CAD. This setup also favors larger price moves. One-month implied volatility on USD/CAD options has risen to nearly 9%, up from about 6% at the start of the year. Buying volatility using strategies like long straddles could be a useful way to position for a major move after Wednesday’s State of the Union address, without needing to pick direction. These options can profit from a sharp move higher or lower in the pair. The Canadian Dollar’s usual sensitivity to oil prices appears to be weakening. Even with WTI holding above $65 a barrel on ongoing US-Iran tensions, the Loonie has struggled to rise. This suggests trade concerns are the main driver. Last week’s EIA report showed a surprise crude inventory build of 4.1 million barrels, but currency markets largely ignored it. That is another sign we should not rely on oil alone to shape CAD positioning. In Canada, attention is now on Friday’s 2025 fourth-quarter GDP data. Forecasts point to a weak 0.8% annualised growth rate, reflecting trade headwinds that appeared late last year. A weaker print would strengthen the dovish case for the Bank of Canada. It could also be the trigger that pushes USD/CAD above 1.3800. We believe call options positioned for a move higher ahead of this release offer a reasonable strategy. Create your live VT Markets account and start trading now.

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