Dollar Demand Driven By Geopolitical Uncertainty
Demand for the US Dollar stayed firm after Iran said it is not directly involved in negotiations with the US. Reuters reported that Iran called a Pakistan-delivered month-long ceasefire proposal and 15-point settlement plan excessive, and demanded sovereignty over the Strait of Hormuz. A senior Iranian official said talks could be held in Pakistan or Turkey if they proceed. Market pricing also reflected expectations that the Federal Reserve will not cut interest rates this year, as higher energy prices have affected inflation expectations. The Canadian Dollar underperformed most major peers, except antipodeans, as risk sentiment remained fragile. Canada’s status as a net oil exporter means higher oil prices from supply disruption can support the Canadian Dollar overall. We recall a similar environment in early 2025 when Middle East uncertainty drove the USD/CAD up towards 1.3830, even as rising oil prices should have supported the loonie. This created a clear divergence between short-term safe-haven flows into the US Dollar and the strong fundamental story for Canada’s currency. At the time, the market was pricing in geopolitical fear over commodity strength. The appropriate response then was to look past the immediate noise using derivatives. Buying longer-dated put options on USD/CAD would have been a strategic way to position for an eventual return to fundamental drivers. This allowed traders to bet on a stronger Canadian Dollar once the risk premium faded, without being exposed to the spot market’s volatility.Why Oil May Reassert Influence
History shows these divergences between USD/CAD and oil prices tend to be temporary. Looking back at the spike in energy prices in 2022, after an initial lag, the Canadian Dollar eventually strengthened significantly against the US Dollar as its terms of trade improved. The lesson from 2025 is that Canada’s position as a net energy exporter provides a powerful anchor that eventually pulls the currency back in line with commodity prices. Today, with West Texas Intermediate (WTI) crude oil holding firm above $85 a barrel, this fundamental support for the Canadian Dollar is even more pronounced. Recent statistics from early March 2026 confirm that Canada’s energy exports are up 9% from the same period last year, directly boosting the nation’s trade balance. This provides a strong fundamental tailwind for the loonie. While the Federal Reserve is proceeding with a slow and data-dependent approach, the Bank of Canada has signaled less room for cuts due to stubborn domestic inflation, narrowing the interest rate advantage for the US Dollar. The current U.S. unemployment rate of 4.1% gives the Fed little reason to rush, creating a stable policy backdrop. Therefore, the primary driver for the currency pair is shifting back towards commodities. Given this context, traders should consider strategies that benefit from a cap on USD/CAD’s upside potential in the coming weeks. Selling out-of-the-money call spreads on the pair allows one to collect premium while defining risk, a strategy that profits if the pair trades sideways or moves lower. This position aligns with the view that strong oil fundamentals will limit any significant rallies in the US Dollar against its Canadian counterpart. Create your live VT Markets account and start trading now.
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