USD/CAD fell for a second day on Monday, trading near 1.3610 and down 0.44%. It hit its lowest level in six weeks as the US Dollar weakened and market sentiment improved.
Markets reacted to reports of possible renewed talks between the US and Iran. Axios reported that Tehran has made a new proposal to end the conflict and reopen the Strait of Hormuz, a key route for global oil supply.
Risk Sentiment And Safe Haven Flows
These reports reduced demand for the US Dollar as a safe-haven. Negotiations were still described as uncertain.
The Canadian Dollar found support from higher oil prices. WTI traded around $94.65, up 1.32% on the day, amid ongoing concerns about supply after weeks of disruption in the Strait of Hormuz.
Canada is the largest oil exporter to the United States, which can support the Canadian Dollar when oil prices rise. Any agreement that eases supply risks could reduce crude prices and weaken this support.
Attention is now on Wednesday’s policy decisions from the Bank of Canada and the Federal Reserve. Both are widely expected to keep interest rates unchanged.
Central Bank Outlook And Volatility
The Fed meeting may add to US Dollar volatility in the coming days. This is due to uncertainty over the Fed’s future stance and the possibility it could be Jerome Powell’s last meeting as chair.
We remember that period in 2025 when USD/CAD tested six-week lows around 1.3610, largely driven by a temporary dip in the US Dollar. That move was fueled by WTI crude prices surging above $94 a barrel on supply fears. This dynamic provided significant, though short-lived, support for the Canadian dollar.
Today, the situation has evolved, as WTI crude is trading closer to $85, well off those 2025 highs. This moderation in oil prices has removed a key pillar of support for the Canadian currency. As a result, we’ve seen USD/CAD hold firm recently, currently trading around the 1.3750 mark.
The market’s reaction in 2025 to potential US-Iran dialogue was a clear reminder of how quickly sentiment can shift. Geopolitical headlines often cause short-term weakness in the US dollar as safe-haven demand eases. Traders should remain cautious, as such moves can reverse just as quickly when negotiations falter.
A year ago, our focus was on the Bank of Canada and the Federal Reserve holding rates steady in a high-inflation environment. Now, the key factor is the divergence in their easing cycles, with the BoC having already initiated rate cuts while the Fed remains more patient. This interest rate differential, which favors holding US dollars, continues to provide a strong floor for the USD/CAD pair.
Given this context, traders should consider strategies that benefit from a stable or stronger US dollar against the Canadian dollar. Buying USD/CAD call options or call spreads offers a way to gain upside exposure while defining and limiting downside risk. This approach protects against any unexpected surge in oil prices that could temporarily strengthen the loonie.
We also learned from the uncertainty around the central bank meetings in 2025 that implied volatility can present opportunities. Selling cash-secured puts on USD/CAD at levels below the current market, perhaps around the 1.3600 strike, could allow traders to collect premium. This strategy is effective if we expect the pair’s downside to remain limited by fundamental support.
