USD/CAD traded near 1.3740 on Monday, down 0.05% on the day. The move followed a softer US Dollar after signs of easing tensions in the Middle East.
Iran’s Foreign Ministry said talks with the US are continuing through Pakistani mediators. It also reported efforts to de-escalate and technical discussions with Oman on security in the Strait of Hormuz.
Middle East Developments And Dollar Reaction
Lower demand for safe-haven assets weighed on the US Dollar. The US Dollar Index (DXY) slipped towards 99.10 after an intraday high near 99.40.
The Canadian Dollar found mild support as oil prices steadied, despite a pullback in West Texas Intermediate from May highs. Canada’s role as a major oil exporter links the currency closely to energy prices.
Canadian markets were closed for Victoria Day, keeping trading volumes thin. Attention now turns to Canada’s April CPI data due on Tuesday.
In the US, the Federal Open Market Committee minutes are due on Wednesday. Markets will look to the release for clues on the future path of Federal Reserve policy.
Looking Back At May 2025
Looking back to this period in May of 2025, we saw the USD/CAD pair testing the 1.3740 level amid a brief pullback in the US Dollar. That temporary drop in the US dollar was largely tied to hopes of de-escalation in the Middle East, a theme that proved to be short-lived throughout the rest of that year. This set the stage for continued demand for the safe-haven greenback.
The Canadian CPI data that was released the following day in May 2025 came in stronger than anticipated at 2.9%, which delayed the Bank of Canada’s easing cycle. This contrasts sharply with the situation today, where softening inflation has markets pricing in over a 70% probability of a BoC rate cut by July 2026. This growing policy divergence is now the primary driver for the pair.
We recall the FOMC minutes from that week last year were quite hawkish, reinforcing the Federal Reserve’s “higher for longer” stance on interest rates. That stance has persisted, with the Fed funds futures market now suggesting no US rate cuts until the first quarter of 2027. This wide interest rate differential continues to weigh heavily on the Canadian dollar.
While stable oil prices provided some support for the loonie back then, the dynamic has since shifted. West Texas Intermediate is currently trading near $75 a barrel, down significantly from its late 2025 highs, reflecting concerns over a slowdown in global industrial demand. As a key Canadian export, weaker oil prices remove a critical pillar of support for the currency.
Given this backdrop, we should anticipate upward pressure on the USD/CAD pair in the coming weeks. Traders could consider buying call options with strike prices around 1.3850 to capitalize on this expected move. This strategy offers a defined risk while providing exposure to potential gains driven by the diverging central bank policies.
For those with exposure to the Canadian dollar, using derivatives to hedge against further loonie weakness appears prudent. Purchasing puts on the Canadian dollar or entering into forward contracts can protect against a move towards 1.3900. The underlying economic data supports a stronger US dollar environment for the foreseeable future.
