Canadian Prime Minister Mark Carney has reached an agreement with US President Donald Trump to negotiate a deal on tariffs within 30 days. This is the first time a clear timeline has been set for an agreement. Currently, the USD/CAD pair is trading up by 0.01% at 1.3571. This slight increase shows cautious optimism in the currency exchange market after the announcement.

Understanding Risk Sentiment

“Risk-on” and “risk-off” describe how investors feel about the market. “Risk-on” means investors are confident and willing to take risks by choosing riskier assets. “Risk-off” means investors prefer safer options because of uncertainty. In a “risk-on” environment, stock markets rise, commodities typically become more valuable, and currencies from countries rich in resources strengthen. The Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD) are examples of such currencies. On the other hand, in a “risk-off” scenario, government bonds increase in value, and commodities like Gold also gain. Currencies like the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) tend to strengthen, as they are considered safe-haven currencies. The recent agreement signals a real effort to ease tariff tensions, with Carney and Trump establishing a clear 30-day timeline. This marks a departure from previous vague discussions. While this announcement doesn’t resolve the dispute, it creates a defined expectation for action. Traders often respond to this with initial interest in riskier assets. The small increase in USD/CAD shows mild optimism, but it is cautious. A 0.01% rise is not significant; it’s a sign that traders are waiting to see how things unfold. Market participants are being careful, as political developments can quickly impact economic policy and sentiment.

Investors and Market Dynamics

During times like this, investor behavior follows the risk sentiment framework. When confidence increases, even briefly, investment tends to flow into equities, oil, industrial metals, and currencies that benefit from global trade. Since the CAD is closely linked to commodities, especially oil, it usually strengthens in these situations. However, this can change quickly if new data or geopolitical news emerges. If negotiations fall through or stall after 30 days, we can expect a quick defensive reaction from investors. This often leads to a shift towards bonds and safe currencies, which are seen as more stable, even if yields are lower. While the USD doesn’t always move in sync with risk-off sentiment, it often gains support during times of currency stress. It’s also important to keep an eye on commodity prices, especially crude oil, as they have a direct impact on the CAD. A downturn in the oil sector could weaken the currency, regardless of overall market sentiment. This is especially true in the short term when news about relations between Washington and Ottawa takes the spotlight. As the deadline approaches, we should see an increase in volatility measures and hedging costs, particularly as we enter the third week. This delayed reaction is common; volatility tends to stay low until traders fear a political agreement might not happen. So, what should traders do in the upcoming sessions? Monitoring implied volatility in USD/CAD options will provide insights into market expectations. A rise in volatility before data or political events may suggest someone is preparing for a significant change. Tracking the relationship between equity indexes and commodity-linked currencies is also helpful—any mismatch could indicate positioning before a shift in market sentiment. For now, traders seem to be taking a cautious approach, hedging their positions. This is wise, given that the risk of sudden headlines or changes in tone from either side is high. Markets usually do not reward overconfidence when the outcomes of policies remain unpredictable. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now