EUR/CAD rose for a fourth straight session, trading near 1.6080 in European hours on Monday, as the Canadian Dollar weakened alongside softer oil prices. The move came as supply concerns in crude markets eased on optimism around a prospective US-Iran agreement, which reduced support for the commodity-linked CAD given Canada’s role as the largest crude exporter to the US.
Reports suggested the US and Iran were close to a deal that would include a 60-day ceasefire extension, with the Strait of Hormuz reopened and Iranian mines cleared in return for the US lifting its blockade on Iranian ports. Attention also turned to upcoming speeches from European Central Bank policymakers, after the ECB warned higher energy prices could lift this year’s inflation forecasts and reinforce the case for a rate increase. Policy debate has centred on a June move and whether the ECB signals further tightening in July, while the Strait of Hormuz remains a key route for nearly 20% of global energy supply and the ECB maintains a 2% medium-term inflation target.
Key Drivers For EUR/CAD Upside
We see the upward trend in EUR/CAD, currently near 1.6080, as a key opportunity in the coming weeks. The primary driver is weakness in the Canadian dollar, which is struggling as oil prices fall. We are therefore considering buying EUR/CAD call options with strike prices around 1.6150 and 1.6200 expiring in late June or July.
The recent drop in crude oil prices has been notable, with WTI crude falling from over $84 to below $78 a barrel in the past month. This directly impacts Canada, which, according to the latest data from the U.S. Energy Information Administration, exports roughly 4.2 million barrels per day to the United States. This fundamental pressure on the CAD is unlikely to reverse unless the geopolitical situation changes.
The potential US-Iran agreement is the single most important catalyst we are monitoring. A successful deal that reopens the Strait of Hormuz would likely send oil prices lower and propel EUR/CAD higher. This binary outcome makes the pair sensitive to news headlines, suggesting that volatility is likely to increase as negotiations proceed.
Historically, tensions in the Strait of Hormuz have led to immediate and sharp oil price spikes. We saw this during the 2019 tanker incidents when Brent crude prices jumped nearly 5% in a single day on supply fears. A failure of the current talks would likely trigger a similar reaction, which would rapidly strengthen the CAD and unwind this entire upward move in EUR/CAD.
ECB Rate Expectations And Tactical Positioning
On the other side of the pair, the European Central Bank’s expected June interest rate hike is providing a solid floor for the Euro. We will be listening closely to President Lagarde’s upcoming speech for any guidance on the bank’s path beyond June. A hawkish tone would serve as an additional catalyst for EUR strength.
Given this setup, our main strategy is to use bull call spreads to express a cautiously optimistic view while defining our risk. This involves buying a call option at a lower strike price and selling one at a higher strike, reducing the upfront cost. This position will profit if the pair continues its gradual climb on the back of diverging central bank policy and easing oil supply concerns.
