USD/CAD rebounded from a dip in Asia on Tuesday, after a modest bounce from sub-1.3600 levels that were the lowest since 12 March. It traded near 1.3630, with limited upside due to opposing drivers.
Mixed messages on US-Iran peace talks supported the US dollar through safe-haven demand. Iran reportedly sent the US a new proposal to reopen the Strait of Hormuz and end the war, while leaving nuclear talks for later.
Key Geopolitical Drivers
The Wall Street Journal reported that US President Donald Trump was sceptical about Iran acting in good faith or accepting his demand to end nuclear enrichment. At the same time, disruption to shipping through the Strait of Hormuz kept crude oil prices elevated.
Higher oil prices supported the Canadian dollar and capped gains in USD/CAD. Traders were also cautious ahead of central bank decisions.
The Bank of Canada announces policy on Wednesday, followed by the outcome of the two-day FOMC meeting. Markets are watching whether higher energy prices raise inflation pressures and affect the policy outlook, which could drive the next move in USD/CAD.
The USD/CAD is showing renewed strength, trading around 1.3750 as of April 28, 2026. This price action is reminiscent of the uncertainty we saw back in 2025 during the US-Iran geopolitical tensions. At that time, conflicting fundamentals created a tense, range-bound market, a pattern that may be re-emerging.
Policy Divergence Outlook
Crude oil remains a critical factor, with WTI currently holding strong above $85 a barrel, a level that typically supports the Canadian dollar. Unlike the sudden, conflict-driven price spikes of 2025, today’s elevated prices are due to persistent supply discipline and steady global demand. This provides a fundamental floor for the loonie but is not enough to drive it significantly higher against the dollar.
The main driver now is the clear policy divergence between the Bank of Canada (BoC) and the US Federal Reserve. With recent Canadian inflation cooling to 2.5%, the BoC is openly discussing potential rate cuts by summer. Conversely, the Fed is holding firm after the latest US inflation print came in hotter than expected at 3.4%, pushing back any rate cut expectations.
This tug-of-war suggests implied volatility in USD/CAD options is likely underpriced for the coming weeks. We believe derivative traders should consider strategies that benefit from a significant move in either direction, such as long straddles, rather than making simple directional bets. The market is pricing in a calm that the diverging economic data does not justify.
Therefore, establishing positions in three-month options could be a prudent way to capture the fallout from the next round of central bank meetings. Look for a sustained break of the 1.3800 level as a signal for further USD strength. A failure to break that resistance could see the pair fall back towards the 1.3650 support level on any dovish Fed commentary.
