USD/CAD stayed near 1.3630 in Asian trading on Thursday after modest gains in the prior session. The Canadian Dollar may face pressure as oil prices fall, with Canada the largest crude exporter to the US.
WTI extended losses for a third straight day, trading around $92.60 a barrel. Oil weakened on reduced supply worries linked to prospects for a Middle East peace deal.
Oil Prices And Geopolitics
The BBC reported that Iran said a US proposal to end the war is “still being considered”, after reports the sides could be close to an agreement. It said the US has offered a one-page memorandum of understanding that would gradually reopen the Strait of Hormuz and lift the US blockade on Iranian ports, while later talks would cover Iran’s nuclear programme, and that nothing has been agreed.
CNBC reported that US President Donald Trump said Iran would be bombed “at a much higher level” if it does not agree to a peace deal. Trump said on Truth Social that the US military offensive, Operation Epic Fury, “will be at an end” if Iran “agrees to give what has been agreed to”.
The US Dollar may come under pressure if easing price concerns lead markets to expect a Federal Reserve rate cut instead of a longer period of restrictive policy.
Looking back at the market sentiment in 2025, we can see the uncertainty that stalled USD/CAD around 1.3630. The potential for a US-Iran deal was pushing oil prices down, which weighed on the Canadian dollar. However, the prospect of Federal Reserve rate cuts was simultaneously creating potential weakness for the US dollar.
We recall that the proposed US-Iran agreement ultimately faltered, which kept a risk premium in oil for a time, but the bigger story became slowing global demand. Today, WTI crude is trading significantly lower, around $81 a barrel, as recent data from the Energy Information Administration showed a surprise build in US inventories last week. This persistently soft oil price continues to act as a headwind for the loonie.
Fed Policy And Market Volatility
The speculation in 2025 about swift Federal Reserve rate cuts also proved to be premature, as inflation remained stubborn. While the Fed has since lowered the overnight rate to 4.5%, the most recent US Consumer Price Index reading of 3.1% has put a pause on further cuts. This reality has provided a solid floor for the US Dollar that was absent in the thinking from last year.
Given these conflicting signals, we see opportunity in options that profit from price movement itself. With USD/CAD currently trading near 1.3750, buying straddles could be a prudent strategy over the coming weeks. This allows traders to capitalize on a significant breakout, whether it is driven by a surprisingly hawkish Fed statement or a further drop in energy prices.
We are also watching the divergence in economic data, which has become more pronounced than it was in 2025. Last month’s US Non-Farm Payrolls showed a healthy addition of 210,000 jobs, while Canada’s own report showed a net change of only 15,000. Any continuation of this trend could be the catalyst that pushes USD/CAD decisively higher.
