USD/CAD snapped a four-day advance and traded near 1.3990 in Asian hours on Wednesday as the USD came under pressure, with easing risk aversion linked to expectations of progress on a US-Iran peace deal. Momentum towards an agreement picked up after US Vice President JD Vance said on Tuesday that President Donald Trump may release a preliminary accord earlier than planned, while Iran’s Foreign Minister Seyed Abbas Araghchi said a fresh round of talks aimed at a final, comprehensive deal will begin in Switzerland.
Markets are also focused on Wednesday’s Federal Reserve policy meeting, where the Fed is expected to keep its benchmark rate unchanged in a 3.50% to 3.75% range; attention will turn to the press conference for guidance from Fed Chair Kevin Warsh. Any downside in USD/CAD may be tempered by pressure on the CAD from softer oil prices, given Canada’s role as the largest crude exporter. Crude has fallen on expectations the US and Iran will sign an interim agreement in Switzerland this Friday, potentially restoring Iranian exports and improving tanker transit through the Strait of Hormuz once the pact takes effect.
—
Peace Deal Volatility and Strategic Approaches
We see the impending US-Iran peace deal creating conflicting pressures on the USD/CAD pair, suggesting volatility over a clear directional trend. While a successful deal reduces demand for the safe-haven US Dollar, the resulting lower oil prices will simultaneously weaken the Canadian Dollar. This environment is becoming more suitable for options strategies that profit from price swings, such as straddles, rather than outright long or short positions.
Oil Dynamics and the Fed’s Role
The impact on crude oil is the most significant factor for the Canadian dollar, as energy products account for over 18% of Canada’s total exports. The prospect of Iran adding over 1 million barrels per day to global supply has already pushed WTI crude prices down near $75 a barrel, a drop of almost 8% this month. We saw a similar dynamic leading up to the 2015 nuclear agreement, where oil prices fell over 20% in the months surrounding the deal as the market priced in the new supply.
Given the historically strong negative correlation between oil prices and the USD/CAD pair, sustained weakness in crude will provide a firm floor of support for the currency pair. This reinforces our view that selling USD/CAD aggressively could be a losing trade, as any strength in the Canadian dollar may be quickly erased by falling oil revenues. We will be watching the pair’s reaction to support levels around the 1.3900 handle.
Today’s Federal Reserve meeting is a key event, but with CME futures markets pricing in a 98% probability of rates holding steady, the focus is entirely on the new Chair’s guidance. Any hint that the Fed is turning more dovish due to easing geopolitical tensions would add to general US Dollar weakness. This could create short-term selling opportunities in the dollar against currencies not linked to commodities, like the Euro or Japanese Yen.
