USD/CAD fell for a second straight day on Thursday, pulling back from the monthly high set earlier in the week. It traded near 1.3665, down almost 0.20% on the day. Losses were limited as traders waited for US-Iran nuclear talks.
The US dollar weakened as uncertainty returned around US President Donald Trump’s trade policy. This followed a Supreme Court ruling last Friday that blocked broad tariffs. Trump then announced a new framework, keeping the overall trade agenda in place.
Temporary Tariffs And Trade Uncertainty
On Wednesday, Trump said the White House would apply temporary global tariffs of 10% for 150 days under Section 122. He also said the administration is aiming to raise duties to 15%. That raised concerns about retaliation and supply chain disruptions.
A stronger tone in equity markets also reduced demand for the dollar as a safe haven. Oil prices stayed near the weekly low after a sharp rise in US stockpiles, although supply risks tied to a possible US-Iran conflict helped support prices.
Lower oil prices offered only limited support to the Canadian dollar, which often moves with commodities. Without clearer follow-through, this may limit further downside in USD/CAD.
USD/CAD is also trading with a softer tone around 1.3450, reflecting ongoing uncertainty around the US dollar. This is similar to the volatility seen last year, after temporary 10% global tariffs were announced in early 2025. Those policy moves also had lasting effects on inflation expectations in both countries.
Inflation And Central Bank Divergence
The effect of those tariffs is now showing up in inflation data. With US CPI at 3.1% and Canadian CPI slightly lower at 2.9%, traders are expecting central bank policy to diverge. This small gap is supporting the view that the Bank of Canada may cut rates sooner than the Federal Reserve.
This potential split in policy is a key factor pushing the pair lower. Markets are pricing in about a 60% chance of a Bank of Canada rate cut by June, while expectations for a Fed cut have shifted into the third quarter. This outlook supports a weaker USD versus the CAD over the medium term.
However, weaker commodities are limiting CAD strength. WTI crude is struggling to stay above $78 a barrel after the latest EIA report showed a surprise build of 3.5 million barrels in US inventories. Softer oil prices are weighing on the loonie and keeping USD/CAD from falling faster.
In options markets, one-month implied volatility for USD/CAD is near a low of 5.8%, suggesting traders do not expect large near-term swings. Even so, risk reversals show a small bias toward CAD calls. This suggests options traders are positioning for modest CAD strength. In other words, while spot trading looks cautious, broader sentiment still points to lower USD/CAD.
With mixed signals, traders may prefer strategies that benefit from a gradual decline in the pair. Buying out-of-the-money CAD call options can be a low-cost way to position for a drop in USD/CAD while limiting risk. Caution is still needed, because weak oil prices could cap Canadian dollar gains.
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