USD/CAD opened with a modest bearish gap on Monday, then rose back above 1.3700 in the Asian session. The move ended a five-day decline after Friday’s drop to just below the mid-1.3600s, the lowest level since 13 March.
Tension between the US and Iran around the Strait of Hormuz increased risk aversion and supported the US Dollar after Friday’s rebound from a near two-month low. Higher crude oil prices supported the Canadian Dollar and limited further gains in the pair.
Iran said it is closing the Strait of Hormuz again to commercial vessels and that ships approaching it will be targeted. This followed an escalation of the US naval blockade of Iranian ports, which Iran described as a breach of the ceasefire, and it cited this as a reason for cancelling a second round of peace talks.
The developments raised supply concerns and pushed oil prices higher. The US Dollar then eased from a one-week high as expectations of a Federal Reserve rate rise fell, which also restrained USD/CAD.
A correction was issued on 20 April at 02:30 GMT to amend the title to “the Canadian Dollar retreats from over one-month high vs USD”, not “one-month low”.
We remember this time last year when tensions in the Strait of Hormuz created mixed signals for the USD/CAD pair. The market was caught between a flight to the safe-haven US dollar and the strengthening effect of higher oil prices on the Canadian loonie. This dynamic led to choppy trading around the 1.3700 level.
Today, while the geopolitical situation is quieter, the influence of energy prices remains a key factor for traders. With West Texas Intermediate (WTI) crude oil currently trading firmly above $95 a barrel, significantly higher than the average price in early 2025, the Canadian dollar has a strong underlying support. This persistent strength in oil is a constant headwind for anyone expecting a major rally in USD/CAD.
The dominant theme now, however, is the divergence in central bank policy, a factor that was only beginning to emerge last year. The Bank of Canada is now openly discussing rate cuts to support a slowing economy, whereas recent US inflation data, like last month’s 3.1% year-over-year CPI reading, has forced the Federal Reserve to maintain a hawkish stance. This policy gap is the main reason we see the pair trading above 1.3800 today.
For the coming weeks, we believe selling cash-secured puts on USD/CAD could be a viable strategy to take advantage of high volatility. This allows traders to collect premium while setting a target to buy the pair on any potential dips caused by oil price strength. Alternatively, buying call option spreads can offer a cost-effective way to position for further upside driven by central bank policy, while capping potential losses.
