Geopolitical Risk Lifts The Greenback
US President Donald Trump said talks were ongoing despite Iran’s public denial. In a Truth Social post, he said Iranian negotiators were “begging” for a deal and warned time was running out, adding there may be “no turning back”. Oil prices stayed volatile and above pre-conflict levels, adding to inflation concerns and complicating rate paths for the Federal Reserve and the Bank of Canada. Markets expect the Fed to hold rates through 2026 at 3.50%–3.75%, with odds of 3.75%–4.00% rising to about 40% by October, while money markets price about 75 basis points of BoC hikes by end-2026. Given the ongoing tensions, we see the US Dollar’s strength against the Canadian Dollar persisting. Derivative traders should consider buying USD/CAD call options with strike prices above 1.3900 to capitalize on this upward momentum. This strategy offers a defined-risk way to profit if geopolitical uncertainty continues to favor the safe-haven greenback. The situation has caused a significant spike in market volatility, which we can use to our advantage. Looking back at similar Mideast tensions in early 2024, implied volatility on currency pairs like this jumped over 30% in a matter of days. Therefore, strategies that profit from price swings, such as long straddles on the CAD, could be effective if a resolution or escalation causes a sharp market move. Oil prices are a critical factor, with WTI crude futures now holding above $98 a barrel, a sharp increase from the $85 range we saw in late 2025. While this typically supports the CAD, the fear of global demand destruction is capping any real benefit for the currency. We should watch options on oil futures, as bets are increasing that prices could test the $110 level if the Strait of Hormuz is threatened.Rates Volatility And Strategy Positioning
This oil-driven inflation complicates the Federal Reserve’s path, especially after we saw US core CPI struggle to get below 3.1% at the end of last year. While the market is pricing a 60% chance of rates staying on hold, traders are increasingly buying Fed Funds futures that would pay out if a precautionary rate hike occurs before October. This positioning acts as a hedge against a more aggressive, inflation-fighting Fed. The Bank of Canada is in an even tougher position, given that our domestic growth was a sluggish 1.2% in the final quarter of 2025, well below the US figure of 2.9%. The market pricing in 75 basis points of hikes seems aggressive given this backdrop, suggesting an opportunity to bet against such a hawkish outcome. We could consider using derivatives on Canadian bond futures to position for the BoC being unable to match the Fed’s potential tightening cycle. With the US economy on stronger footing and the USD benefiting from safe-haven flows, the path of least resistance for USD/CAD remains upward. A simple strategy is to structure bull call spreads, which involves buying a call option and selling another at a higher strike price. This lowers the cost of the trade while still allowing for profit from a continued, steady rise toward the 1.4000 psychological level in the coming weeks. Create your live VT Markets account and start trading now.
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