The Canadian Dollar eased against the US Dollar on Thursday, with USD/CAD near 1.3621 after earlier dropping to about 1.3525. Demand for the US Dollar remained firm amid the US-Iran war. Oil prices stayed elevated due to supply disruption risks in the Strait of Hormuz, which can support the CAD because Canada exports crude. Iran’s Supreme Leader, Mojtaba Khamenei, said the strait’s closure should remain a tool to pressure Iran’s enemies. The US Dollar continued to gain, supported by demand for liquidity during geopolitical stress. As oil is priced in US Dollars, buyers often need more USD for energy purchases. The US Dollar Index (DXY) traded around 99.70, near its highest level since November 2025. Markets also focused on the risk that higher oil prices could raise inflation and keep interest rates higher for longer. Expectations for Federal Reserve rate cuts have been reduced, with markets no longer fully pricing even one 25-basis-point cut in 2026. The Bank of Canada is expected to keep rates on hold through 2026. US Initial Jobless Claims for the week ending March 7 fell to 213K from 214K, below the 215K forecast. Housing Starts rose to 1.487 million versus 1.35 million expected. US data due Friday includes the PCE Price Index, preliminary Q4 annualised GDP, Durable Goods Orders, and University of Michigan sentiment indices. Canada is due to release labour market data. Given the heightened demand for the US Dollar as a safe haven during the US-Iran conflict, we should position for continued strength in the USD/CAD pair. The path of least resistance appears to be higher, so acquiring call options or long futures contracts on USD/CAD seems prudent. This strategy directly plays into the ongoing flight to quality that is currently dominating market sentiment. The rally in crude oil, with West Texas Intermediate (WTI) now trading above $115 a barrel for the first time since the summer of 2022, is failing to support the loonie as it normally would. We saw a similar dynamic during the initial weeks of the Ukraine conflict in 2022, where the dollar’s safe-haven appeal initially overshadowed the commodity price surge. This historical precedent suggests the greenback will likely remain in control as long as the conflict in the Strait of Hormuz is escalating. With geopolitical uncertainty so high, implied volatility in the currency markets has jumped, making options more expensive. We should consider using strategies like bull call spreads on USD/CAD to cheapen the cost of entry and define our risk. This allows us to maintain a bullish outlook while protecting against a sudden reversal if tensions were to de-escalate unexpectedly. The divergence in central bank policy expectations provides a strong fundamental tailwind for our position. According to fed funds futures, the market has dramatically repriced rate expectations, with the probability of a Fed rate cut by the end of 2026 collapsing from over 80% at the start of the year to below 30% today. Meanwhile, the Bank of Canada is widely expected to remain on hold, increasing the interest rate advantage for the US dollar. A key risk to this view is if oil prices continue to spike uncontrollably, which could force the Bank of Canada to adopt a more hawkish stance to fight inflation. We remember how a temporary supply scare back in 2025 briefly caused the Canadian Dollar to rally before risk aversion took over again. Therefore, we must closely monitor communications from the BoC for any change in tone. All eyes should be on tomorrow’s flood of US economic data, particularly the PCE inflation report. A higher-than-expected inflation reading would solidify the view that the Fed cannot cut rates and would likely propel USD/CAD towards the 1.3700 level. Conversely, a surprisingly soft report could provide a temporary dip and a better entry point for long positions.

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