USD/CAD gave up earlier gains on Tuesday, trading around 1.3800 after touching an intraday high near 1.3821, as firmer oil prices underpinned the Canadian Dollar even as broader US Dollar support held. The US Dollar Index (DXY) was around 99.16 after briefly dipping below 99.00 on Monday, with demand for the Greenback supported by continuing uncertainty over US-Iran negotiations.
Tensions rose after US forces carried out “defensive strikes” in southern Iran on Monday, while talks were also reported to be stuck on issues including Iran’s nuclear programme, sanctions relief, frozen assets and a US naval blockade on Iranian ports. Iran’s Tasnim News Agency said Tehran wants $24 billion in frozen funds released, with at least half available immediately after any deal is announced, and The Wall Street Journal reported the US Navy has resumed guiding commercial ships through the Strait of Hormuz. West Texas Intermediate (WTI) crude was up nearly 4% at about $93, supporting the oil-linked Canadian Dollar and feeding inflation concerns that keep the Federal Reserve (Fed) and the Bank of Canada (BoC) in focus; BoC Deputy Governor Nicolas Vincent said policy choices become less clear-cut when shocks coincide with structural change. US CB Consumer Confidence eased to 93.1 in May from 93.8 in April, ahead of US PCE inflation on Thursday and Canada GDP on Friday.
Opposing Forces Shaping USD/CAD
We see the USD/CAD is caught between two powerful and opposing forces, keeping it trading tightly around the 1.3800 level. Geopolitical tensions in the Middle East are providing a strong bid for the US Dollar as a safe haven. At the same time, those same tensions are pushing oil prices higher, which gives direct support to the Canadian Dollar.
We are watching oil prices carefully as West Texas Intermediate holds firm around $93 a barrel. Recent reports from OPEC+ confirm that the cartel intends to maintain its current production cuts, ensuring that supply remains tight globally. This provides a very solid floor for the commodity-linked Canadian dollar, limiting the upside for the USD/CAD pair.
On the other side of the equation, persistent inflation in the United States justifies the US Dollar’s strength. Recent Personal Consumption Expenditures (PCE) data showed core inflation remains stubbornly high at 2.8%, well above the Federal Reserve’s target. This reinforces our view that the Fed will have little choice but to maintain its restrictive monetary policy in the near term.
Canada’s own economic picture complicates matters, as the Bank of Canada also faces pressure to keep rates elevated. The Canadian economy posted a blockbuster jobs report last month, adding over 90,000 positions and pushing the unemployment rate to a historic low of 5.0%. This domestic strength gives the Bank of Canada the justification it needs to match any hawkishness from the Fed.
Volatility Ahead For USD/CAD Traders
Given these conflicting drivers, we anticipate a period of high volatility rather than a clear directional trend. Key data releases this week, particularly the US inflation report and Canadian GDP, will likely trigger sharp but potentially short-lived moves. We believe strategies that profit from price swings, such as buying straddles or strangles using options, are favorable in this environment.
We recall the sharp currency dislocations during previous energy price shocks, like the one in 2022, and the current situation is developing along a similar path. A sudden de-escalation of tensions in the Strait of Hormuz could rapidly erase the US Dollar’s risk premium and send USD/CAD tumbling. Any directional positions should therefore be approached with caution and managed with tight risk parameters.
