USD/CAD has reached a seven-month high of 1.4119, influenced by a decline in crude oil prices. The Canadian Dollar weakened due to lower oil prices, driven by a sharp increase in US oil inventories.
The USD/CAD pair continues to rise, trading around 1.4110 during Asian trading, while the commodity-linked Canadian Dollar struggles. West Texas Intermediate oil prices dropped for a third session, trading near $60.00 per barrel, as US inventories surged by 6.5 million barrels, surpassing the expected 2.4-million-barrel draw.
US Government Shutdown Impact
The US Dollar faces challenges from the ongoing US government shutdown, which has persisted for six weeks. Recent efforts to pass short-term funding have failed, this deadlock could become the longest in US history.
The USD received support from the cautious US Federal Reserve policy stance for December. Fed Chair Jerome Powell noted uncertainty for another rate cut and suggested a wait-and-see approach until new data is available.
The Canadian Dollar is influenced by the Bank of Canada’s interest rates, oil prices, economic health, inflation, and trade balances. Oil impacts CAD since it’s Canada’s biggest export, affecting its value, and higher oil prices are CAD-positive.
With USD/CAD currently trading firmly around 1.3950, we see a clear parallel to past cycles of Canadian Dollar weakness. The primary driver remains depressed crude oil prices, with West Texas Intermediate struggling to hold above $72 per barrel. Last week’s EIA report showed a surprise inventory build of 4.2 million barrels, fueling concerns of a supply glut heading into 2026.
Market Expectations and Strategies
This pressure on the loonie is compounded by slowing global demand forecasts, which directly impacts Canada as a major energy exporter. For traders, this reinforces the fundamental weakness of the CAD relative to the US Dollar. The market is pricing in this divergence, expecting the trend to continue through the end of the year.
We remember a similar setup several years back when a sharp rise in US inventories pushed the pair above 1.4100. That period also saw uncertainty from the US side, but the overwhelming weakness in oil ultimately dictated the pair’s direction. History suggests that as long as crude remains under pressure, the path of least resistance for USD/CAD is upward.
On the other side of the pair, the US Dollar is finding support from a hawkish Federal Reserve. Recent US CPI data came in slightly above expectations at 3.4%, making further rate hikes a distinct possibility in early 2026. This contrasts with the Bank of Canada, which is expected to hold rates steady, widening the policy gap between the two nations.
Given this outlook, buying call options on USD/CAD seems like a prudent strategy to capture further upside. We are looking at strikes around 1.4050 with expirations in January 2026 to allow time for the trend to play out. This provides a defined-risk way to profit if the pair continues its climb.
For those wanting to collect premium while expressing a bullish-to-neutral view, selling cash-secured puts with a strike price around 1.3700 could be attractive. This strategy profits from time decay and volatility if the pair stays above that level. Alternatively, traders could express a direct view on oil by buying puts on WTI futures, betting on a drop below $70.
