USD/CAD ticked up after a small pullback the prior session, trading near 1.3850 in Asian hours on Wednesday. The Canadian Dollar stayed subdued despite firmer crude, as risk aversion limited follow-through in commodity-linked FX.
WTI extended gains for a third session to about $92.60 a barrel after a new escalation in the Middle East, with Iran launching ballistic missiles towards Kuwait and Bahrain. ABC News reported that US Central Command intercepted missile and drone strikes and carried out self-defence attacks on Iran’s Qeshm Island. Markets also weighed the risk of disruption at the Strait of Hormuz, a scenario that could tighten energy supply and add to global inflation pressures, reinforcing expectations that the Federal Reserve keeps interest rates elevated for longer and underpinning the US Dollar. US data added to that case: the May 2026 ISM Manufacturing PMI rose to 54.0 from 52.7, while April JOLTS job openings climbed to 7.61 million, a near two-year high.
Durable Strength In USD/CAD Amid Broken Correlations
Given the current market dynamics, we see the US dollar’s strength against the Canadian dollar as a durable trend for the coming weeks. The usual positive correlation between oil prices and the CAD has broken down due to overwhelming risk aversion. Traders should therefore look to position for further USD/CAD upside, as safe-haven demand for the greenback is trumping commodity-related flows.
The surge in WTI crude to over $92 a barrel, driven by Middle East tensions, is a significant inflationary threat. The last time energy prices were sustained at these levels was during the 2022 supply shock, which led to multi-decade high inflation rates globally. This historical parallel strongly supports the Federal Reserve’s case for keeping interest rates elevated to combat rising price pressures.
Hawkish Fed, BoC Divergence, And Key Data On Deck
The Fed’s hawkish stance is being validated by robust economic data, justifying a higher-for-longer interest rate policy. In fact, interest rate futures markets are now pricing in less than a 10% probability of a Fed rate cut before the fourth quarter of 2026. This widening policy divergence with the Bank of Canada makes buying USD call options an attractive strategy to capture potential gains.
All eyes are on this Friday’s Nonfarm Payrolls report, which could be the next major catalyst for the dollar. Following the very strong JOLTS report, a payrolls number exceeding the market consensus of 210,000 would likely propel USD/CAD through recent resistance. We note that one-week implied volatility for the pair has already ticked up to 7.8%, suggesting traders are preparing for a significant price swing on the data release.
