USD/CAD eased in Tuesday’s Asian session, giving back part of Monday’s advance that took it to its highest level since late March. The pair traded just under the mid-1.3900s and was down less than 0.05% on the day, with selling pressure failing to gather momentum.
Iran and Israel said on Monday they had halted attacks, which improved risk sentiment and pulled the safe-haven US Dollar off a two-month high. At the same time, softer geopolitical risk weighed on crude prices, a move that typically undercuts the commodity-linked Canadian dollar and helps cap downside in USD/CAD. Optimism remained restrained by US-Iran disputes over Tehran’s nuclear programme and the Strait of Hormuz, while hawkish Federal Reserve pricing also limited dollar weakness; markets are assigning over a 70% chance of a Fed rate hike in 2026, a view reinforced by Friday’s stronger US jobs data. Focus now turns to May US CPI on Wednesday and PPI on Thursday, alongside Middle East developments and oil-price swings.
Monetary Policy Divergence and Economic Data
We see the USD/CAD pair consolidating near the 1.3750 level after the Bank of Canada delivered a widely expected 25 basis point rate cut last week. This policy divergence with the Federal Reserve, which is holding firm, creates a fundamental tailwind for the pair. The latest employment data underscored this, with US Non-Farm Payrolls beating expectations at 285,000 while Canada’s unemployment rate ticked up to 6.3%.
Crude oil prices are providing a floor for the commodity-linked Canadian dollar, with WTI holding steady above $80 a barrel following the recent OPEC+ decision to extend production cuts. However, this support for the loonie is being offset by a persistent risk-off sentiment stemming from ongoing trade tensions in the South China Sea. This environment continues to favor the safe-haven US dollar, limiting any significant downside for USD/CAD.
Outlook and Trading Strategies
Looking ahead, we are positioning for continued US dollar strength against the Canadian dollar. The recent US Consumer Price Index (CPI) reading for May came in slightly hot at 3.5% year-over-year, reinforcing our belief that the Fed will not be in a hurry to cut rates. We believe buying call options on USD/CAD with expiry dates in the next 4-6 weeks offers a good risk-to-reward profile for a move towards the 1.3800 level.
Periods of monetary policy divergence, similar to what occurred in 2015-2016, have historically led to sustained trends, and we anticipate this pattern will repeat. Selling short-dated put options could also be a strategy to collect premium, given the strong support established by the differing central bank outlooks. Traders should now closely watch the upcoming US retail sales figures for further confirmation of economic resilience.
