The Canadian Dollar (CAD) outperformed other major currencies but was flat against the US Dollar (USD) near 1.3740 during Friday’s European session. It rose even as oil prices dipped slightly after Iran-related developments reduced supply concerns.
Canada exports oil to the US, and higher oil prices can increase foreign inflows into the Canadian economy. WTI crude retraced from $100 after Israel said it would stop targeting Iranian oil infrastructure and after comments from US Treasury Secretary Scott Bessent about a likely removal of sanctions on Iranian oil held at sea.
Markets expect the Bank of Canada to keep interest rates unchanged for longer, as risks to inflation and economic growth have increased. The US Dollar also stayed firm as the Federal Reserve is expected to extend its pause due to inflation risks.
The US Dollar Index (DXY) was up 0.2% near 99.30. On Thursday, the index fell sharply after global central banks warned about energy-driven inflation risks, which reduced expectations of a widening gap between Fed policy and other central banks.
We see the USD/CAD pair trading in a tight range around 1.3740 as the strong US Dollar offsets any strength in the Canadian currency. The US Dollar Index holding firm near 99.30 suggests that broad Greenback demand is preventing the Loonie from taking advantage of its own strength. This balance of power means we should be cautious about taking a strong directional view right now.
The pullback in WTI crude oil from over $100 a barrel to around $95 is a key factor capping the Canadian Dollar’s upside. Looking back at data from late 2025, we saw a similar pattern where oil price spikes failed to push USD/CAD decisively lower because of the Federal Reserve’s hawkish stance. While high energy prices are fundamentally supportive for Canada, the immediate downward momentum in oil is a headwind for the currency.
Both the Bank of Canada and the Federal Reserve appear to be on an extended pause, creating a policy stalemate that anchors the currency pair. February 2026 inflation reports in both countries showed core inflation remaining stubbornly above 3.5%, reinforcing the market’s belief that neither central bank is in a hurry to cut rates. This lack of policy divergence is the primary driver behind the suppressed volatility in the spot market.
This quiet price action likely hides underlying tension, suggesting we should look at buying volatility. Implied volatility on one-month USD/CAD options has risen to a six-week high, indicating that the market is beginning to price in a larger move. Positioning through long straddles or strangles could be a prudent way to profit from a breakout, regardless of the direction.
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