USD/CAD slipped slightly during Wednesday’s Asian session, but it stayed close to the monthly high set on Tuesday. The pair traded just under 1.3700, down 0.05%, as markets waited for a speech from US President Donald Trump.
Trump is set to deliver the first State of the Union address of his second term at 02:00 GMT. The speech is expected to focus on the economy and trade uncertainty. It will also cover Iran ahead of a third round of nuclear talks on Thursday.
Oil Prices Support The Canadian Dollar
Worries about a possible US military strike on Iran lifted crude oil prices ahead of the talks. Higher oil prices supported the Canadian dollar and capped gains in USD/CAD.
At the same time, hawkish comments from several Federal Reserve officials kept the US dollar firm, just below its highest level since 23 January, reached last week. This helped limit further declines in USD/CAD.
In the North American session, markets are expected to respond to more remarks from Fed officials. Traders are also waiting for a clear break from last week’s range before expecting a stronger near-term move.
Looking back a year to early 2025, USD/CAD was stuck near 1.3700. The main driver was geopolitical uncertainty, with traders focused on a State of the Union address and updates on US-Iran nuclear talks. The pair stayed range-bound as hawkish Fed comments offset rising oil prices.
Policy Divergence Drives The Trend
By February 2026, the focus has shifted away from speeches and toward hard data and central bank policy. The key difference is that the Bank of Canada cut interest rates last month to 4.75% due to a cooling economy, while the Federal Reserve has kept its benchmark rate unchanged. This widening policy gap supports the US dollar versus the loonie.
Oil’s role has also changed from the sharp geopolitical risk premium seen in 2025. WTI crude is now steady near $85 per barrel, supported more by coordinated OPEC+ production discipline than by fears of an imminent conflict. This stability helps underpin the Canadian dollar, but it has not been strong enough to offset the interest-rate-driven trend.
Given this backdrop, derivative strategies should focus on the widening policy gap. Consider buying USD/CAD call options to position for more upside, as recent US inflation data suggests the Fed is unlikely to cut rates soon. A bull call spread may be a more cost-effective way to express this view while limiting premium costs, especially with the pair trading near 1.3850.
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