USD/CAD was flat on Wednesday, hovering near 1.3700 and staying close to four-week highs. Trading was pulled between a firm US Dollar and Canadian Dollar support from higher Oil prices.
Inflation themes remained in focus as Middle East tensions and stalled US–Iran talks kept Oil elevated. This fed concerns that central banks may keep tighter policy for longer.
US Producer Price Index inflation rose to 6% year on year in April from 4.3%, the highest in four years. Core PPI increased to 5.2% year on year from 4%, following a stronger-than-expected CPI report.
US 10-year Treasury yields moved towards 4.49%, helping the US Dollar. The US Dollar Index rose towards 98.50.
Markets reduced expectations for Federal Reserve rate cuts and shifted towards a longer hold. Some pricing also reflected the risk of another rate rise before year-end.
WTI crude held near $98 per barrel, supporting the Canadian Dollar as Oil is Canada’s main export. This helped limit further gains in USD/CAD.
Markets also watched Bank of Canada meeting minutes for discussion of geopolitical risks, Oil, and any splits on future rate moves. Scotiabank placed fair value for USD/CAD near 1.3510, while noting US rate spreads favoured the Dollar.
We recall this time last year when stubborn inflation concerns kept the USD/CAD exchange rate elevated around 1.3700. In May 2025, a hot US Producer Price Index at 6% annually fueled expectations that the Federal Reserve would maintain its restrictive policy, or even hike again. The situation has shifted significantly since then, creating new opportunities.
Currently, US inflation has moderated, with the latest annual Consumer Price Index figure at 3.4%, a noticeable drop from the aggressive price pressures we saw in 2025. While the Federal Reserve remains cautious about cutting rates too soon, the risk of another hike is now completely off the table for most market participants. This has put a cap on how high US bond yields can go, limiting the US dollar’s explosive upside potential from last year.
The Canadian economic picture has diverged, with domestic inflation falling faster to a recent reading of 2.7%. At the same time, oil prices are no longer providing the same level of support, as WTI crude has backed away from the $98 per barrel mark seen in 2025 to trade closer to $79. This combination of lower inflation and reduced oil revenue gives the Bank of Canada a stronger reason to begin cutting interest rates before its US counterpart.
For derivative traders, this growing policy divergence is the key factor for the coming weeks. The widening interest rate differential in favor of the US dollar should provide a steady tailwind for the USD/CAD pair. Traders could consider buying USD/CAD call options to position for a gradual move higher, capturing potential upside while defining their maximum risk.
Given the market is waiting for one central bank to act before the other, implied volatility in the pair may increase ahead of key data releases and meetings. This environment could favor strategies that benefit from a significant price move, regardless of direction, such as a long straddle. This would allow traders to profit from a breakout if either the Bank of Canada or the Federal Reserve surprises the market.
