USD/CAD traded near 1.3665 on Tuesday, up 0.27% on the day. It rebounded after falling briefly below 1.3600 on Monday.
Demand for the US Dollar rose amid uncertainty around US-Iran talks. Tensions near the Strait of Hormuz supported safe-haven buying, while the US Dollar Index traded near 98.75, up 0.25%.
Drivers Of The Latest Move
USD/CAD gains were limited by higher oil prices that supported the Canadian Dollar. West Texas Intermediate traded near $98.60 per barrel, with prices supported by supply disruption in the Middle East.
Markets are cautious ahead of central bank decisions. The Federal Reserve is expected to keep rates in the 3.5%-3.75% range, while the Bank of Canada is expected to hold rates near 2.25%.
Attention is on guidance from both banks and on Middle East developments. These factors may set the next move in USD/CAD.
We recall this period in 2025 when the USD/CAD was caught between opposing forces. The US Dollar saw safe-haven demand due to geopolitical tensions, while the Canadian Dollar was strongly supported by oil prices nearing $100 a barrel. This created a tight trading range as neither currency could establish dominance.
How The Setup Has Shifted
The situation has changed considerably as we look at the market today. West Texas Intermediate (WTI) crude has since pulled back from those highs, with recent futures data showing prices stabilizing around $83 per barrel, removing a key pillar of strength for the Canadian dollar. This cooling in the energy market followed a period of increased global production in late 2025.
Central bank expectations have also evolved since last year’s standoff. While the Bank of Canada has maintained a relatively steady policy, the US Federal Reserve has signaled a more dovish stance in response to moderating inflation figures seen in the first quarter of 2026. This has narrowed the interest rate differential that previously favored the US Dollar.
This new environment, with less support for both currencies, suggests an increase in volatility is likely. We believe derivative strategies that capitalize on price swings, rather than a specific direction, are now more appropriate. Traders should consider purchasing options straddles, which are positioned to profit from a significant move in either direction as these new economic themes play out.
Looking ahead, we are watching for divergence in upcoming economic data, specifically employment reports from both nations. Historically, a surprise in non-farm payrolls, like the unexpected weakness we saw in the fall of 2025, can trigger sharp moves. A similar deviation in either country’s data could provide the catalyst that breaks the pair out of its current balance.
