USD/CAD held a tight range on Monday, with the Canadian dollar failing to gain traction even as the US dollar softened, after a mild dip in crude weighed on the commodity-linked currency. The pair traded around 1.3950, staying close to two-month highs. Oil and the greenback retreated after Iran’s Fars News Agency said Tehran had ended military operations against Israel, following weekend exchanges that marked the first strikes between the two since an April ceasefire.
WTI traded near $90 a barrel after earlier touching $93.50. Attention is also shifting to monetary policy: the Bank of Canada is due on Wednesday and is widely expected to keep rates unchanged at 2.25% for a fifth straight meeting, as officials weigh mixed signals from inflation and labour data against slowing growth after Canada entered a technical recession with two consecutive quarters of contraction.
In the US, markets are looking ahead to inflation data later this week before next week’s Federal Reserve decision, with inflation sitting further from the Fed’s 2% target after the US-Iran war drove oil higher. Pricing implies a pause at the coming meeting, while expectations for another rate rise later this year have firmed.
Canadian Dollar Faces Oil and Policy Headwinds
We see the USD/CAD pair trading in a tight range near 1.3800, as the Canadian dollar is failing to gain ground despite broader US dollar weakness. The main headwind for the loonie is crude oil, with WTI futures struggling to hold gains above $85 a barrel. The market seems to have fully priced in the OPEC+ decision to extend production cuts, limiting further upside for now.
Attention is now shifting to the Bank of Canada’s (BoC) interest rate decision next week, where we expect them to hold rates steady at 3.00%. With Canadian inflation holding around 2.5% and first-quarter GDP growth coming in at a modest 1.2%, the BoC has little reason to act. We anticipate a neutral statement, leaving the door open to a cut later in the year if economic data weakens.
US Data Supports Dollar Strength, Creating Trading Opportunities
The situation in the United States continues to support a stronger dollar, making long USD/CAD a favorable position for us. The latest US Consumer Price Index (CPI) remains stubbornly above 3%, and the recent Nonfarm Payrolls report showed a solid gain of over 250,000 jobs. This combination makes it very unlikely the Federal Reserve will consider cutting rates before the fourth quarter.
Given this divergence between the central banks, we are looking at buying USD/CAD call options expiring in three to six months to profit from a potential grind higher. Geopolitical tensions in the Middle East have eased, but any surprise flare-up would cause an oil spike, creating volatility. Therefore, we are also considering cheap, out-of-the-money put options on the Canadian dollar as a hedge against any sudden risk-off event.
