USD/CAD fell to around 1.3920 in European trading on Monday as the US Dollar eased amid improved market mood linked to talks on a Middle East ceasefire. Reuters reported that the US and Iran have received a proposed framework to end hostilities, with a two-step plan for an immediate ceasefire followed by a wider agreement. Pakistan’s army chief, Field Marshal Asim Munir, has reportedly been in continuous contact with US Vice President JD Vance, special envoy Steve Witkoff, and Iranian Foreign Minister Abbas Araghchi. Tehran said it would not reopen the Strait of Hormuz under a temporary ceasefire arrangement. Iranian media also reported that officials are working on plans to impose a toll on tankers leaving the Persian Gulf. The fall in USD/CAD was limited as the Canadian Dollar faced pressure from softer oil prices. Bloomberg cited an Axios report saying the US, Iran, and regional mediators are discussing terms for a potential 45-day ceasefire, after US President Donald Trump threatened to rain “hell” on Tehran if it did not make a deal. Lower oil prices reduced concern about an energy-driven rise in inflation and the chance the Bank of Canada keeps rates restrictive for longer. The current ceasefire talks between the US and Iran create a complex setup for the Canadian dollar. While a weaker US dollar is pushing USD/CAD lower towards 1.3900, the corresponding drop in oil prices is capping the loonie’s strength. This divergence means we should prepare for significant price swings in the coming weeks. Given the binary outcome of these negotiations, we are seeing a notable increase in demand for options. One-month implied volatility on USD/CAD has already jumped to 9.5%, a sharp rise from the calmer conditions we saw in February and March of this year. This suggests positioning for a large move, regardless of the direction, through straddles or strangles could be a prudent strategy. The connection between crude oil and the Canadian dollar cannot be ignored, even with the current focus on the greenback. With WTI crude breaking below $80 a barrel on this news, we must recall how the CAD struggled in 2025 when oil prices corrected sharply. A sustained dip in energy could quickly erase any gains the loonie makes from broad US dollar weakness. These geopolitical shifts are directly influencing monetary policy expectations for the Bank of Canada. Overnight index swaps now imply only a 20% probability of a rate hike at the BoC’s next meeting, a significant drop from the 50% chance priced in just last week. This dovish repricing could act as another headwind for the Canadian dollar if the ceasefire holds and inflation fears subside. We must also position for the risk of these talks collapsing, which could happen suddenly. Looking back at the Hormuz escalation in late 2025, we saw how quickly risk aversion can drive funds back into the US dollar safety trade. Buying cheap, out-of-the-money USD calls could serve as an effective hedge against a rapid snap-back in the currency pair.

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