USD/CAD edged up to around 1.3810 in Asian trading on Tuesday after small declines a day earlier, with the Canadian Dollar under pressure as risk aversion outweighed support from firmer crude. WTI rebounded after four sessions of losses to about $91.50 a barrel, as supply concerns resurfaced following US “self-defence strikes” in southern Iran on Monday. US Central Command said the operation hit missile launch sites and Iranian vessels said to be attempting to deploy mines, while President Donald Trump said talks to end the conflict and reopen the Strait of Hormuz were “proceeding nicely”.
The US Dollar held steady on safe-haven demand tied to geopolitical tension and expectations of a hawkish Federal Reserve. The CME FedWatch tool showed markets pricing a near 41.0% probability of a 25-basis-point rate rise by year-end, and attention is turning to upcoming PCE inflation data for policy direction. Separately, CAD performance is typically influenced by Bank of Canada rate settings and oil, Canada’s largest export, alongside domestic growth, inflation and the trade balance; the BoC targets inflation of 1–3% and can also use quantitative easing or tightening to steer credit conditions.
USD/CAD Supported by Safe-Haven Demand and Diverging Central Bank Policies
We are observing the USD/CAD exchange rate holding firm around 1.3810, indicating a clear struggle for the Canadian dollar. Despite the benefit of high crude oil prices, a broader sense of risk aversion in global markets is providing strong support for the US dollar. This dynamic suggests that safe-haven demand is currently the more dominant force for this currency pair.
The strength in the US dollar is being fueled by two main factors: ongoing geopolitical tensions and the anticipation of a hawkish Federal Reserve. Market expectations are leaning towards another interest rate hike by the end of the year, a sentiment that has been gaining traction. The US Dollar Index (DXY) reflects this, having recently climbed to a six-month high of 106.50 as investors seek safety.
All eyes are on the upcoming US PCE inflation data, which will be a critical factor for the Fed’s next move. Recent figures show Core PCE remains above the Fed’s 2% target, and the CME FedWatch Tool now indicates a 45% probability of a rate hike by September, up from 41% last week. A hotter-than-expected inflation report would almost certainly solidify these hawkish expectations and push the USD even higher.
On the Canadian side, the economic picture appears more cautious, limiting the Canadian dollar’s potential. The Bank of Canada has held its key interest rate steady at 4.5% amidst concerns about slowing growth, even as Canadian inflation persists above its target range. This divergence in central bank policy, with a potentially more aggressive Fed and a patient BoC, favors a stronger USD/CAD.
Strategy Considerations and Key Risks
Given this outlook, we believe positioning for further upside in USD/CAD is the prudent strategy in the coming weeks. We see value in buying USD/CAD call options with an expiration in late June 2026. A strike price around the 1.3900 level could offer a favorable risk-reward profile, allowing for participation in potential gains while capping the downside risk to the premium paid.
However, we must remain vigilant about the key risks to this view, primarily stemming from crude oil and geopolitics. A sudden de-escalation of tensions or a spike in WTI crude prices above the $95 per barrel mark could quickly strengthen the Canadian dollar. Therefore, implementing stop-losses on any long positions or using protective put options is a sensible way to manage potential reversals.
