The USD/CAD currency pair has risen above 1.3900, approaching monthly highs near 1.3920. This increase is largely due to strong US economic data and falling oil prices, which impact the Canadian Dollar. The USD/CAD has grown by over 0.2%, bouncing back from recent lows of 1.3850.

Impact of US Economic Data

The US Producer Price Index (PPI) showed a 3% yearly increase, surprising many who expected only a 2.7% rise. In addition, Retail Sales for November grew by 0.6%, beating forecasts of a 0.4% increase. These positive results suggest that the Federal Reserve may keep its current monetary policy unchanged for now. Oil prices have dropped nearly 2% after US President Donald Trump announced reduced tensions with Iran, which has pressured the Canadian Dollar. Key factors affecting the CAD include interest rates from the Bank of Canada and oil prices, as oil is Canada’s largest export. Economic health, inflation, trade balance, and US conditions also play significant roles in the CAD’s value. Typically, stronger oil prices and economic data bolster the Canadian Dollar. The USD/CAD pair is showing strong performance, recently rising above 1.3700 as we progress through mid-January 2026. This strength comes from the contrast of a solid US economy against a Canadian dollar weakened by declining oil prices. We see this trend continuing in the coming weeks. Recent data supports this perspective. The December 2025 US Non-Farm Payrolls report revealed the addition of 210,000 jobs, keeping the unemployment rate at a low 3.8%. Also, the latest US CPI data showed core inflation steady at 2.8%, strengthening our belief that the Federal Reserve will maintain interest rates. In contrast, there are growing expectations that the Bank of Canada might have to consider rate cuts later this year to support a slowing economy.

Oil Prices and the Canadian Dollar

The decline in WTI crude oil prices from over $85 a barrel in late 2025 to around $76 this week, due to concerns about slowing global demand, adds further pressure on the Canadian Dollar. This drop in Canada’s main export directly impacts the currency’s strength. The economic policies of the US and Canada are diverging, creating a clearer pathway for USD/CAD strength. We saw a similar situation last year when strong US producer price data, coupled with geopolitical news that eased oil prices, resulted in a sharp rise in the USD/CAD pair. History suggests that when these powerful forces align, the trend can be quick and lasting. It seems this dynamic is returning. For derivative traders, this market scenario suggests taking bullish positions on USD/CAD. Purchasing call options with a strike price around 1.3800 that expire in late February or March could be an effective way to capitalize on the expected upward movement. Implied volatility is rising, so these positions should be initiated soon to benefit from the move before options become too costly. A more conservative strategy could involve using bull call spreads to manage upfront costs and minimize risks. For example, buying a 1.3750 call and selling a 1.3900 call could provide good potential returns if the pair continues to rise as anticipated. Watching the 1.3650 level as a critical support point is vital, as a fall below it may indicate a temporary pause in this upward trend. Create your live VT Markets account and start trading now.

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