The USD/CAD currency pair has experienced notable fluctuations in January 2026, with the Canadian dollar recently regaining strength against its U.S. counterpart. After reaching a peak of approximately 1.3925 in mid-January, the exchange rate has declined, settling into the 1.3750-1.3800 range. Over the past five trading days, the Canadian dollar has appreciated, resulting in a 1% drop in the USD/CAD pair and a 0.23% decrease year-to-date. As it approaches the 1.3650 mark, a level that previously initiated its rally, traders are keenly observing potential shifts in momentum.
Reasons Behind the Strengthening of the Canadian Dollar
The recent surge in the Canadian dollar can be attributed to a combination of robust economic indicators and emerging pressures on the U.S. dollar. Notably, Canadian retail sales figures for November 2025 exceeded expectations, with a remarkable 3.1% year-over-year increase and a 1.1% month-over-month rise, bringing total sales to C$70.4 billion. Additionally, stable oil prices, supported by supply disruptions in Kazakhstan, have enhanced Canada’s trading position as a leading oil exporter.
Conversely, the U.S. dollar has encountered challenges, entering a period of softness at the start of 2026. Market speculation suggests that the Federal Reserve may reduce interest rates to safeguard employment ahead of anticipated inflation stemming from new governmental spending later this year. Furthermore, recent announcements indicating that the U.S. will not pursue a military takeover of Greenland have alleviated some geopolitical tensions, further diminishing the demand for the U.S. dollar as a safe haven.
Key Risks and Market Predictions
While the Canadian dollar has demonstrated resilience, several risks could alter the current trajectory of the USD/CAD pair. A sharp decline in oil prices could undermine the Canadian dollar’s gains, particularly if global demand wanes or if supply issues are resolved swiftly. The ongoing review of the USMCA trade agreement introduces additional uncertainty. Potential U.S. tariffs on Canadian oil could weaken Canada’s terms of trade, impacting its economic outlook. If Canada retaliates with tariffs of its own, businesses reliant on U.S. supplies may face challenges, hindering growth and putting further pressure on the loonie.
Market analysts predict that the USD/CAD pair will struggle for upward momentum below the 1.3710 level, with immediate support anticipated at 1.3675. A breach of this support could lead to a test of the lower Bollinger Band at 1.3655. On the flip side, the Relative Strength Index (RSI) currently sits at 32, indicating oversold conditions. An intraday breakout above 1.3710 could instigate a momentum shift, with primary resistance at 1.3735 and secondary resistance at 1.3750.
The recent decline in the USD/CAD exchange rate can primarily be attributed to rising oil prices, which reached a three-month high, alongside the weakening of the U.S. dollar in response to anticipated rate cuts from the Federal Reserve and political uncertainties. Given that Canada exports a significant amount of oil, fluctuations in oil prices directly affect the Canadian dollar’s strength. As crude prices rise, the loonie tends to strengthen, leading to a decrease in the USD/CAD exchange rate.
In conclusion, while a reversal in the USD/CAD pair is possible, with indications of support and bullish market signals, medium-term forecasts suggest a continued decline if the U.S. dollar remains weak. As traders remain vigilant, the unfolding economic landscape will play a crucial role in shaping the future of this currency pair.
