USD/CAD hovered near 1.3990 on Tuesday, little changed as markets stayed cautious ahead of the Federal Reserve policy decision. The pair retained a bullish tilt, helped by ongoing softness in the Canadian Dollar as crude prices remained pressured. A memorandum of understanding between the United States and Iran is scheduled to be signed on Friday in Bürgenstock, Switzerland, according to the Swiss Foreign Ministry, feeding expectations of smoother energy flows and weighing on oil. With Canada a major energy exporter, lower crude tends to undermine the Loonie and keeps attention on the Bank of Canada’s policy outlook.
On the US side, the US Dollar was broadly steady with the Fed expected to keep rates unchanged, while focus turns to the Summary of Economic Projections and the dot plot for guidance on the future path of rates. Recent data point to a cooling labour market: the four-week average of the ADP Employment Change showed 25.5K jobs added, down from 29K previously. Inflation remains elevated, with CPI at 4.2% year-on-year in May, the highest since April 2023, though softer oil linked to US-Iran diplomacy could ease price pressures over time.
Volatility Strategies and Outlook on USD/CAD
Given the market’s cautious stance ahead of the Federal Reserve decision, we believe short-term volatility in USD/CAD is underpriced. Implied volatility on one-week options has ticked up to 7.8%, but we see this as an opportunity to position for a larger-than-expected move. We are looking at straddle strategies to capitalize on a potential breakout following the release of the Fed’s dot plot.
The continued weakness in oil prices remains the primary driver for our bullish outlook on the pair. With WTI crude futures for July delivery slipping below $72 a barrel this morning, the lowest since February 2026, pressure on the Canadian dollar is intensifying. We are therefore adding to long positions through call options with a 1.4100 strike price expiring in the next month.
Risks and Event-Driven Hedging
However, we are mindful that the US-Iran agreement is a significant geopolitical variable that could reverse course unexpectedly. We recall the sharp oil price rally in late 2023 when similar diplomatic talks faltered, causing a rapid unwind in short energy positions. Consequently, a portion of our portfolio is hedged with protective put options in case the deal announced for Friday collapses.
We are also closely watching the interest rate differential, especially as Canada’s latest employment report showed a surprising addition of 35,000 jobs, beating forecasts. If the Bank of Canada is forced to adopt a more hawkish tone to combat domestic strength while the Fed signals a pause, the primary uptrend in USD/CAD could be challenged. This divergence represents the main risk to our core bullish thesis over the next several weeks.
