USD/CAD slipped after two sessions of gains, hovering around 1.3970 in Asian trading on Monday as the US Dollar weakened across the board. The move followed a sharp easing in market risk aversion after reports of a comprehensive US-Iran peace deal to end a near four-month conflict and fully reopen the Strait of Hormuz.
Further pressure came through energy markets. West Texas Intermediate crude fell over 4% to about $79.60 a barrel after The New York Times cited President Trump saying the Strait would remain “permanently toll-free”. Any downside in USD/CAD may be checked as the Canadian Dollar, which is commodity-linked, can face headwinds when oil drops; Canada is the largest crude exporter to the US, leaving CAD sensitive to price swings. Separately, Bloomberg reported Pakistan’s Prime Minister Shehbaz Sharif confirmed an immediate and permanent end to military operations on all fronts, including Lebanon, while Iran’s National Security Council confirmed a ceasefire and said final talks depend on the US meeting commitments under a memorandum of understanding and the maritime blockade ending immediately.
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Volatility Spikes and Trading Strategies
Given the sharp reduction in risk aversion following the US-Iran peace agreement, we see implied volatility in both WTI crude and currency options spiking significantly. This suggests positioning for large price swings in the immediate term rather than committing to a single direction. We should consider strategies like buying straddles or strangles to profit from this heightened uncertainty over the next few days.
The USD/CAD pair presents a complex picture, as the weaker US Dollar is offset by a Canadian Dollar hammered by falling oil prices. Historically, the USD/CAD and WTI crude prices have a strong negative correlation, often between -0.6 and -0.8, meaning a drop in oil typically sends USD/CAD higher. This fundamental pressure may limit the pair’s downside, making it a poor candidate for clean directional trades until the oil market finds a new floor.
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Oil and U.S. Dollar Directional Opportunities
We see a clearer opportunity in positioning for further downside in crude oil itself. A 4% single-day drop is significant, similar in scale to reactions following major OPEC+ supply increase announcements, and the removal of the Strait of Hormuz risk premium suggests prices could fall further. Therefore, we are looking at buying WTI put options dated for the coming weeks to capitalize on this bearish momentum.
The broad US Dollar weakness is also a key theme, as its safe-haven appeal has been suddenly removed. The Dollar Index (DXY) has previously shown sustained pullbacks from cycle highs during periods of major geopolitical de-escalation, as capital flows back into higher-risk assets globally. This indicates that shorting the US Dollar against currencies not heavily linked to commodities, like the Euro or Swiss Franc, could offer a more straightforward trade than the conflicted USD/CAD.
