USD/CAD Market Update

USD/CAD Rallies to 1.3698 – Thursday, February 19, 2026

Current Level: Low-1.37s (24hr range 1.3668–1.3715)

USD/CAD is trading near 1.3698 on Thursday morning, climbing to multi-week highs as risk sentiment deteriorates amid escalating U.S.-Iran tensions. The pair has gained approximately 30 pips from the previous session, with the U.S. dollar strengthening across the G10 basket as geopolitical concerns drive safe-haven flows. WTI oil prices surged as much as 4% yesterday after reports emerged that President Trump has discussed potential military action against Iran, with prediction markets now pricing 61% odds of a U.S. strike by March 2026.

Market Overview:

Risk appetite is fragile this morning, with equity markets opening lower as investors digest geopolitical tensions against the current macroeconomic backdrop. Global bond yields are higher once again, albeit with no major moves worth reporting. Energy prices are elevated, with WTI hitting August 2025 highs on the geopolitical bid. The U.S. dollar is stronger versus the entire G10 basket, finally acting as a risk-off currency after weeks of weakness despite strong domestic economic data.

Iran Tensions Drive Risk-Off Sentiment:

The main story of the day comes from Washington after President Trump has reportedly discussed the timeline for strikes against Iran, including as soon as this weekend. No final decision has been made, but the U.S. military is ready and has begun moving personnel out of the Middle East as a precaution. Recently, U.S. and Iranian officials held talks about Iran's nuclear program, but major disagreements remain and talks ultimately led nowhere.

The market impact has been profound, with WTI oil prices surging as much as 4% yesterday after Vice President JD Vance said that Iran failed to address their red lines during the talks. Polymarket odds of a U.S. strike on Iran by March 2026 have surged from 30% last week to 61% today, suggesting a strike is on the horizon. While the outcome remains uncertain, any direct military action should drive oil prices meaningfully higher due to supply concerns. Some analysts point to three-digit territory should it turn into a prolonged conflict.

U.S. Economy Finishes Year on Strong Note:

Recent economic releases suggest the American economy finished the year on a surprisingly high note, with December and January data across housing and manufacturing consistently beating expectations. Housing starts surged to over 1,404k units and industrial production for January expanded by a robust 0.7%, significantly outpacing the initial consensus forecast. These developments have created clear upside risk for fourth-quarter growth projections, with the Atlanta Fed GDPNow estimate climbing toward 3.7%, sitting well above the earlier 2.6% forecast and the more conservative Blue-Chip consensus.

This broader economic engine is running much hotter than previously anticipated, driven largely by a resurgence in manufacturing and heavy investment in the technology sector as companies continue to funnel capital into artificial intelligence infrastructure. This underlying strength has prompted a notable shift in tone from the Federal Reserve, as recent minutes skew decidedly hawkish. While lingering worries about persistent inflation remain, there is a marked decrease in concern regarding the labor market. Most significantly, the record of the January meeting showed that several participants supported a two-sided description of the committee's future interest rate decisions. This indicates that if inflation remains at above-target levels, the Fed is prepared to consider upward adjustments to the target range for the federal funds rate, rather than just maintaining or cutting them.

Fed Confirms Japanese Yen Rate Checks:

The volatility of the currency market was further addressed in the minutes, which confirmed the much-speculated Japanese yen rate checks from January. The Desk noted that these requests for indicative quotes were made solely on behalf of the U.S. Treasury, acting in the New York Fed's role as fiscal agent. Despite these fundamental strengths and clarified policy stances, the reaction in equity markets has been characterized by significant internal volatility and cautious positioning from large speculators. Even though the S&P 500 remains relatively flat for the year, this surface-level stability masks massive dispersion. Professional traders have maintained net short positions on futures since the start of 2025, showing a persistent skepticism that contrasts with the improving growth narrative but aligns with the Fed's renewed willingness to hike rates if necessary.

Canadian Dollar Positioning Shifts Bullish:

Heading into 2026, the extreme pessimism that previously plagued the Canadian Dollar has officially flipped. Speculative positioning against the Loonie, which plummeted to record net short levels of nearly 250,000 contracts during 2024 and 2025, has staged a strong recovery. The unwinding of these bearish bets has pushed the currency back into net long territory, with positioning currently sitting at 6,000 contracts. This shift marks a return to sentiment levels not seen since 2022, effectively removing the persistent structural headwind that characterized the previous two years and signaling a fresh bullish outlook for the currency.

This shift in positioning has translated into tangible strength in the spot market, with USD/CAD retreating from late-2025 highs toward the 1.36 to 1.37 range. This move is heavily influenced by a broader 0.8% decline in the US Dollar Index rather than purely idiosyncratic Canadian strength. The stabilization of risk reversals, which have moved from a bearish bias two weeks ago to hovering near zero, further confirms that the options market is no longer pricing in a significant premium for protection against further CAD weakness.

Despite the recent unwinding of bearish bets, the Canadian Dollar is noticeably lagging its G10 peers to start 2026. While the Loonie has moved into a slight net long position, its year-to-date performance remains a modest 0.4%, failing to capture the significant upside momentum seen in other major currencies. In stark contrast, other commodity-linked and high-beta currencies have surged, with the Norwegian Krone up 6.1% and Australian Dollar up 5.9% leading the pack. The New Zealand Dollar has also outperformed the CAD significantly with a 4.0% gain. This divergence highlights a relative lack of specific demand for the CAD. Tariff risk premiums and a stagnant economy outlook will likely continue to cap further gains despite the sentiment recovery.

Canadian Data/Outlook:

Canada has no major economic data releases today, with the focus remaining on broader market developments and U.S. data. The Bank of Canada is expected to remain on hold at 2.25% through the remainder of 2026, with the central bank comfortable at the bottom of the neutral range for the foreseeable future. The Canadian dollar faces headwinds from trade policy uncertainty and the potential for CUSMA renegotiation, though the light Canadian economic calendar leaves the pair vulnerable to U.S. data releases and global risk sentiment shifts. The geopolitical tensions in the Middle East provide some support to the Canadian dollar through higher oil prices, though this is more than offset by the broader risk-off tone favoring the U.S. dollar.

Fed Watch:

The Federal Reserve is expected to remain on hold at its next policy meeting on March 18, with current market pricing pointing to unchanged policy through the near term. The hawkish January Fed meeting minutes released yesterday showed that several participants supported a two-sided description of the committee's future interest rate decisions, indicating that if inflation remains at above-target levels, the Fed is prepared to consider upward adjustments to the target range for the federal funds rate. This policy pivot suggests that the central bank is prepared to lean against the current growth momentum if it threatens price stability. The Fed's focus on persistent inflation aligns with the durable domestic demand seen in recent hard data.

Technical Picture:

Resistance: 1.3725 (CIBC near-term target), 1.3728 (61.8% retracement of 2023-2025 advance and key resistance level), 1.3900 (CIBC range top and selling level)
Support: 1.3668 (24hr low), 1.3600 (CIBC buying level and key support), 1.3494 (76.4% retracement and 200-week moving average), 1.3482 (January 30 low and critical support zone)
Outlook: CIBC strategists favored a move toward 1.3690 in the near term, and the pair has reached that level. Their next target sits at 1.3725. Big picture, CIBC likes playing the 1.36 to 1.39 range for the time being. The pair has closed above the 200-week moving average, which is good news for bulls. Current levels favor USD buyers, with CIBC targeting a 1.3600 to 1.3900 range in the near term.

Week Ahead:

The week ahead features a heavy slate of U.S. data on Friday, including Q4 GDP, the core PCE price index, and flash PMI readings. Markets expect GDP growth to moderate to 3.0% from 4.4% previously, while core PCE is forecast to tick higher to 0.3% monthly. The data will be crucial in determining whether the Fed's hawkish shift remains appropriate or if adjustments to the policy path are warranted. For USD/CAD, the immediate question is whether the pair can break above resistance at 1.3725 and 1.3728 or if renewed selling pressure will push the pair back toward support at 1.3600. The geopolitical situation in the Middle East adds another layer of uncertainty, with oil price movements likely to influence the Canadian dollar in the near term.

Other Notes:

• EUR/USD Drifts Lower on Fed Hawkishness: EUR/USD drifted lower on the back of a gradual recovery in the greenback supported by firmer U.S. macro data. The move was reinforced by hawkish January Fed meeting minutes, which helped push the pair below the 1.18 mark. The price action clearly points to a fast-improving U.S. macro narrative reasserting itself in the dollar's direction of travel. For the remainder of the week, the pair is expected to hover around the 1.18 level, with a risk of slipping further on a hawkish PCE price index release tomorrow. Should the release reinforce the still-hot inflation concerns highlighted in the minutes, EUR/USD could firm below the 1.18 mark into next week.
• GBP Hoping for Retail Therapy: GBP/USD has found some temporary support at the 50-day moving average at 1.3528 after sliding more than three cents from its late-January peak, but the structure still looks fragile. The pullback in cable is being driven less by a clear macro shift and more by an unwinding of stretched short-USD positioning. Rate expectations have shifted meaningfully, with money markets now fully pricing a 25bp BoE cut by April, with better-than-even odds of a move as early as March. UK retail sales are back in focus on early Friday morning after the previous release surprised to the upside. Markets are primed to trade weak UK data more aggressively than strong data, so any softening in the headline or underlying trend would emphasize rate cut bets and weigh on GBP.
• Mexican Peso Resilience Continues: The Mexican Peso highlights broader resilience as it continues to navigate a complex environment of domestic stability and international trade uncertainty. Even with reports suggesting potential changes to regional trade pacts, the currency has maintained its position as a top performer thanks to a decisive monetary policy stance from the central bank. By holding interest rates at 7% to counter core inflation pressures, the local board has ensured that the currency offers a 325-basis point advantage over the Federal Reserve. This robust yield differential has solidified the status of the peso as a preferred choice for global asset managers looking to diversify into local assets while seeking protection against broader market swings.
• Emerging Market Capital Rotation: The opening weeks of 2026 have signaled a major rotation of capital into emerging market local assets as a softening US dollar encourages investors to move away from traditional developed market havens. This trend is largely supported by a broad normalization of valuations and a drop in exchange rate volatility which has significantly reduced the risk premium required for cross border investments. Current market conditions draw striking parallels to previous cycles of outperformance such as the post crisis liquidity surge of 2009 or the commodity recovery witnessed in 2016.

Market Mood:

RSI Scale: <30 Oversold | 30-40 Risk-Off | 40-60 Neutral | 60-70 Risk-On | >70 Overbought

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions. Vantry Capital Inc.