USD/CAD edged higher on Wednesday, supported by a firmer US Dollar, while a modest dip in crude oil prices weighed on the Canadian Dollar. The pair traded near 1.3760, close to one-month highs.
Markets were calm as participants watched developments in the US-Iran war and the risk of renewed strikes after fresh threats. Donald Trump said on Tuesday that military action could resume if talks fail, and gave Iran “two to three days” to reach a deal.
Usd Cad Near One Month Highs
Iran warned the conflict could spread beyond the Middle East if the United States and Israel restart attacks. The US Dollar stayed supported, with the US Dollar Index (DXY) around 99.39 near six-week highs.
Concerns about supply disruption via the Strait of Hormuz kept oil prices elevated, limiting further gains in USD/CAD. Higher oil prices also added to inflation pressures, affecting expectations for central bank policy.
In the United States, inflation rose sharply in April, leading markets to price in a possible Federal Reserve rate rise by year-end. In Canada, inflation data released on Tuesday came in below expectations, trimming near-term Bank of Canada rate-rise bets and weighing on the Canadian Dollar.
Looking back to this time in 2025, we saw USD/CAD rally towards 1.3760. This move was driven by a strong US Dollar, which benefited from both geopolitical tensions with Iran and expectations of a hawkish Federal Reserve. The Canadian dollar, meanwhile, was weighed down by softer domestic inflation data.
Policy Expectations Flip In 2026
Fast forward to today, May 20, 2026, and the geopolitical landscape is calmer, reducing the safe-haven demand that supported the US Dollar last year. With the Strait of Hormuz remaining open and global trade flows stabilizing, the extreme risk premium has evaporated from the market. Oil prices are now primarily driven by supply and demand fundamentals, with WTI crude currently trading around a stable $81 per barrel, a significant change from the war-fueled volatility of 2025.
The key shift for us is the reversal in central bank policy expectations. US inflation has finally moderated to 2.8% as of last month’s report, and the Fed is now signaling a pause, with markets pricing in potential rate cuts by the end of 2026. In contrast, Canadian inflation has proven stickier than anticipated, recently printing at 3.1% and forcing the Bank of Canada to maintain a hawkish stance.
This fundamental flip suggests that the path of least resistance for USD/CAD is now lower. Last year’s strategy of buying USD/CAD calls is no longer viable; the environment now favors strategies that profit from a declining or range-bound pair. We should consider buying CAD calls against the USD or implementing put spreads on USD/CAD to position for a move back towards the 1.3400 level in the coming weeks.
