The USD Index Update

The USD Index has bounced back from its lowest level since February 2022, despite expectations for a dovish Federal Reserve limiting its recovery. A rate cut is expected twice this year, and there will soon be a new Fed Chair. Concerns about the independence of the central bank are rising, especially with attempts to dismiss Fed Governor Lisa Cook. Economic and geopolitical risks are increasing, and the rise in Crude Oil prices since October 2025 may support the Loonie, putting a cap on USD/CAD gains. We await a clear buying trend to confirm that spot prices have hit a bottom. With significant events today from both the Bank of Canada and the Fed, we face major risk. The market is trying to navigate a weak US dollar while the Canadian economy sends mixed signals that might influence the Bank of Canada. This creates a challenging situation where the easiest path forward isn’t clear right now. In the coming weeks, we should look for strategies that benefit from increased volatility, as surprises from either central bank could cause sudden shifts. The one-week implied volatility for USD/CAD options has risen to 9.8%, indicating market nerves about these announcements. Buying a simple straddle or strangle could be a good move to take advantage of a breakout from the current narrow range.

Potential USD/CAD Strategies

If we think the recent rise in oil, with WTI crude over $92 a barrel, will outweigh a dovish Bank of Canada, then the bounce to 1.3600 may present a selling opportunity. We could implement a bear call spread by selling the 1.3650 calls and buying the 1.3700 calls for protection, allowing us to collect a premium. This strategy would profit if the pair stays flat or continues its downward trend due to a weak US dollar outlook. On the other hand, a dovish surprise from the Bank of Canada is still a possibility. Last week’s jobs report showed a surprising drop of 5,000 positions in December 2025. If that happens, we might see USD/CAD surge as the Canadian dollar weakens. In this case, a bull put spread by selling puts at the 1.3550 strike could be used to bet that recent lows will hold as support. This situation echoes the central bank policy divergence we saw in 2024, which led to sharp currency movements. With a 75% chance of another rate cut by June in the Fed funds futures market, and uncertainty surrounding the next Fed Chair, it’s crucial to hedge existing exposures. Even simple puts against long USD/CAD positions should be considered to protect capital from an unexpectedly dovish Fed outcome. Create your live VT Markets account and start trading now.

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