USD/CAD fell for a sixth session on Monday, trading near 1.3663 after dropping from an intraday high around 1.3709. The move followed a softer US Dollar after it opened the week with a bullish gap.
Over the weekend, Iran again closed the Strait of Hormuz, citing ceasefire violations linked to a US naval blockade. Reports of a diplomatic effort led by Pakistan reduced risk demand for the US Dollar and supported the Canadian Dollar.
In Canada, March CPI rose 0.9% month on month, up from 0.5% in February but below the 1.1% forecast. Annual CPI increased to 2.4% from 1.8%, under the 2.5% forecast.
Core CPI rose 0.2% month on month, down from 0.4% in February, while the annual core rate moved up to 2.5% from 2.3%. The data points to a cautious Bank of Canada approach ahead of its meeting later this month.
Markets are watching for further US-Iran developments, with a possible second round of talks this week as a two‑week ceasefire expires on Wednesday. US President Donald Trump said it is “highly unlikely” he will extend the ceasefire, and that the Strait will not reopen until a deal is signed.
Looking back to this time in 2025, we recall how USD/CAD pulled back towards 1.3660 as specific US-Iran geopolitical risks temporarily faded. The market was also reacting to a softer-than-expected Canadian inflation report for March 2025. That dynamic created a short-term opportunity for Canadian dollar strength.
The inflation picture today is quite different, making a repeat of that move less likely. While the annual CPI in March 2025 was 2.4%, the latest data for March 2026 shows inflation is proving much stickier at 2.9%, keeping pressure on the Bank of Canada. This persistent inflation challenges the central bank’s ability to be as patient as it was last year.
We remember the Bank of Canada’s cautious stance in 2025, but they have since begun cutting rates, with the policy rate now at 4.25%. This contrasts with the US Federal Reserve’s rate, which remains at 5.00%, creating a significant yield advantage for the Greenback. This interest rate differential should continue to provide underlying support for USD/CAD.
Volatility last year was driven by very specific headlines about the Strait of Hormuz. Today, options markets show implied volatility is being supported more by broad concerns over a global economic slowdown rather than a single flashpoint. This suggests traders should consider strategies that protect against sustained weakness in the Canadian dollar, such as buying call options on USD/CAD.
The soft economic backdrop mentioned in 2025 has seen only modest improvement, with Canada’s unemployment rate declining slightly from 6.1% to a still-elevated 5.8%. This underlying economic softness, combined with the interest rate gap, makes it difficult to build a strong case for sustained Canadian dollar appreciation. Therefore, any dips in USD/CAD should be viewed as potential buying opportunities.
