USD/CAD pared earlier declines on Monday as a drop in oil prices weakened the Canadian Dollar, even while the US Dollar remained under pressure. The pair traded near 1.3584 after falling to about 1.3525. Canada is a major oil exporter, so oil price moves often affect the currency and growth outlook. Scotiabank estimates a lasting oil shock could lift Canadian GDP by about 0.5% over the next year, based on a $10 per barrel rise in WTI.

Oil Prices And The Canadian Dollar

WTI opened with a gap higher amid disruption risks in the Strait of Hormuz, briefly reaching about $113 per barrel before falling back. It later traded near $91.40 per barrel. The retreat followed reports that G7 countries are discussing a co-ordinated release of oil reserves via the International Energy Agency. Oil prices remain elevated, which can support Canada’s outlook but can also add to global inflation pressure. The Bank of Canada is expected to keep policy steady while assessing energy-driven inflation risks. In the US, markets have reduced expectations for near-term rate cuts, with CME FedWatch showing a 35.3% chance of a 25 bp cut in June and 41.2% by July. Focus shifts to Canada’s jobs data on Friday, US CPI on Wednesday, and US PCE inflation on Friday.

Rates And Volatility Outlook

Looking back at the situation in early 2025, we saw extreme volatility in oil, with WTI prices spiking to $113 per barrel before pulling back. As of today, March 10, 2026, the market has stabilized considerably, with WTI crude trading much lower, around $82 per barrel. This has removed a major source of support for the Canadian dollar that was present during the geopolitical tensions of last year. Last year, we were anticipating the Federal Reserve to remain on hold while the Bank of Canada adopted a wait-and-see approach. Now, the narrative has shifted to the pace of monetary easing, as both central banks have begun to cut rates from their cycle highs. With recent US inflation data from February 2026 showing core CPI still stubbornly above 3%, the Fed may be forced to proceed more cautiously than the Bank of Canada. This divergence in central bank policy creates opportunities in the options market for USD/CAD. Given that the pair has been trading in a relatively tight range, implied volatility has decreased, making long volatility strategies like straddles potentially underpriced. A surprise move from either central bank could cause a significant breakout, and options offer a defined-risk way to position for that. The key factor for the coming weeks will be the interest rate differential between the US and Canada, which currently stands at 25 basis points in favor of the US dollar. We must closely watch the forward guidance from the upcoming central bank meetings for any change in tone regarding the future pace of cuts. Any indication that the Bank of Canada will cut rates more aggressively than the Fed will likely push USD/CAD higher. Create your live VT Markets account and start trading now.

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