USD/CAD traded near 1.3660 in Asian hours on Monday, holding above 1.3650 after small losses in the prior session. The move came as the US Dollar rose on safe-haven demand linked to rising Middle East tensions, with the ISM Manufacturing PMI due later in the day. Further gains in USD/CAD may be limited if the Canadian Dollar gets support from higher oil prices, as Canada is the biggest oil exporter to the United States. West Texas Intermediate was volatile and traded around $71.50. WTI opened with a gap up after the Iranian IRGC Navy announced a stoppage of shipments through the Strait of Hormuz. More than 20% of global oil moves through the Strait of Hormuz, and Iran is the fourth-largest producer in OPEC. Israel carried out heavy strikes on Beirut after Hezbollah fired missiles across the border early Monday, after US-Israel attacks on Iran over the weekend reportedly killed Iran’s Supreme Leader Ayatollah Ali Khamenei. The Israeli military also issued evacuation orders for several Lebanese towns. US President Donald Trump said hundreds of targets were hit, including Revolutionary Guard facilities, air defence systems, nine vessels, and naval infrastructure. Fed Governor Mi Lan called for interest rate cuts as soon as possible, citing subdued underlying price pressures and measurement distortions. Given the escalating conflict and the potential closure of the Strait of Hormuz, we should anticipate extreme market volatility. The CBOE Volatility Index (VIX), which has been hovering around a relatively calm 15 for most of early 2026, is likely to surge past 30, a level not sustained since the banking turmoil of 2023. Traders should consider buying options, such as straddles or strangles, on major indices to profit from this expected spike in price swings. The initial jump in WTI crude to $71.50 is likely just the start of a major repricing event. Historically, supply shocks of this magnitude cause prices to multiply; for instance, during the 1990 Gulf War, oil prices more than doubled in just a few months. Purchasing out-of-the-money call options on WTI and Brent futures for the coming months is a direct strategy to capitalize on the expected surge toward and possibly beyond $100 per barrel. For the USD/CAD pair, the situation creates a difficult tug-of-war, making directional spot trades very risky. The US Dollar will attract strong safe-haven bids, but a skyrocketing oil price provides a powerful tailwind for the Canadian Dollar. We should therefore focus on options strategies that benefit from a large move in either direction, as the fundamental case for which currency will dominate is unclear. The Fed’s position introduces another layer of uncertainty, reminiscent of the stagflationary pressures of the 1970s. A governor’s call for rate cuts clashes directly with the inflationary shock from a potential energy crisis, which could send headline CPI well above the 2.8% annual rate reported for January 2026. This conflict suggests significant volatility in interest rate futures, making options on SOFR contracts an attractive way to trade the Fed’s impending policy dilemma. This combined geopolitical and energy crisis poses a significant threat to global growth and corporate earnings. We saw during past oil shocks, like the one in 2008, that they often precede economic recessions. Consequently, buying put options on equity indices like the S&P 500 is a prudent hedge against the probable downturn in stock markets.

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