USD/CAD fell to about 1.3630 on Monday, testing six-week lows after a move to 1.3713 on Friday. The US Dollar was the weakest performer among G8 majors, falling against the Canadian Dollar for a second day.
Reports of a possible negotiated end to the Middle East conflict reduced demand for the safe-haven Dollar. A second round of US-Iran talks was cancelled, yet Axios reported that Iran sent a new proposal to the US.
Iran Proposal And Hormuz Impact
Axios said Iran offered a path to end the conflict and reopen the Strait of Hormuz, while leaving nuclear talks for later. The Strait, which transports about a fifth of global oil production, has been shut for almost two months.
Oil prices stayed supported near $100 per barrel. US WTI rose about $6 over two days and traded at $94.70, which supported the commodity-linked Canadian Dollar.
Markets are also focused on central banks this week. The Bank of Canada is expected to keep policy unchanged for a fourth meeting on Wednesday, and the Federal Reserve is also expected to hold rates.
CME FedWatch shows markets fully price rates to stay on hold through 2026, with a 66% chance of no change in December. The article also notes Jerome Powell’s term ends in May and Kevin Warsh has been appointed as his replacement.
Shift In 2026 Market Backdrop
We are seeing a different picture today, April 27, 2026, compared to the situation late last year. Back then, we saw broad US dollar weakness push USD/CAD to test lows below 1.3630. The pair has since recovered and is now trading closer to 1.3750 as the dynamics around oil and central bank policy have shifted.
The optimism we saw surrounding Middle East peace talks late last year eventually materialized, leading to the reopening of the Strait of Hormuz. This has had a direct impact on crude oil, which was a key support for the Canadian dollar. WTI crude, which was trading near $95 a barrel, has since fallen and is now hovering around $83 a barrel, removing a major tailwind for the loonie.
The Federal Reserve’s leadership change has also been a critical factor for traders to watch. The market, which last year was pricing in steady rates for all of 2026, is now more uncertain under new Chairman Kevin Warsh’s more hawkish tone. With US CPI inflation proving sticky and holding around 3.5%, traders should consider options strategies that protect against the Fed holding rates higher for longer than previously anticipated.
Meanwhile, the Bank of Canada appears to be on a slightly different path. Canadian inflation has shown more progress, with the latest CPI figures coming in at 2.9%, which is much closer to the central bank’s 2% target. This growing policy divergence could lead the BoC to cut rates before the Fed, putting further upward pressure on the USD/CAD pair in the coming weeks.
Given this divergence and the shift in oil prices, we expect volatility to increase from its current relatively low levels. The market may be underpricing the risk of a sharp move in the currency pair. This presents an opportunity for traders to consider buying options like straddles to position for a significant breakout following the next central bank announcements.
