USD/CAD rose for a third day on Monday and traded just below the mid-1.3900s in Asia, near a nearly four-month high set last week. Gains were limited as higher crude oil prices supported the commodity-linked Canadian dollar.
Donald Trump said Iran’s power plants and bridges could be targeted if the Strait of Hormuz is not reopened by Tuesday, while Iran set new conditions for reopening it. These developments supported demand for the US dollar, alongside market expectations of a US Federal Reserve rate rise.
Oil Geopolitics And Dollar Demand
The US Nonfarm Payrolls report on Friday showed 178K jobs were added in March, following a revised net loss of 133K the prior month. The unemployment rate fell to 4.3%, and together with oil-driven inflation concerns this reduced expectations of a near-term Fed rate cut and kept US Treasury yields elevated.
Concerns about supply disruption pushed crude oil to a nearly four-week high, supporting the Canadian dollar and limiting USD/CAD upside. Traders were watching for sustained trading above 1.3900 and the year-to-date high, after a near one-month rise from 1.3525.
Looking back at this time in 2025, we saw the market fixated on a strong US dollar, driven by geopolitical risk and expectations of Federal Reserve rate hikes. The narrative was that rising oil prices were the main force holding the USD/CAD pair back from breaking decisively above the 1.3900 level. This dynamic set the stage for a tense standoff between currency and commodity traders.
The situation has changed significantly as we now look at the market in April 2026. The focus has completely shifted from rate hikes to anticipated rate cuts by the Fed, with the CME FedWatch tool now pricing in a 70% chance of a cut by July. Inflation has cooled considerably, with the latest CPI report showing a year-over-year rate of just 2.4%, giving the Fed ample room to ease policy.
Diverging Central Bank Paths
Meanwhile, the Bank of Canada appears to be in an even more dovish position due to a notable slowdown in the domestic economy. Recent data from Statistics Canada showed unemployment ticking up to 6.2%, and GDP growth for the last quarter was a meager 0.5% annualized. This growing policy divergence, where the BoC is expected to cut rates sooner and more aggressively than the Fed, is a primary driver for a weaker Canadian dollar.
The support the loonie received from oil in 2025 has also faded. WTI crude oil prices have fallen from their 2025 highs and are now hovering around $78 per barrel, as EIA reports consistently show rising global inventories amid softening demand from Asia. This has removed a critical pillar of support that previously capped USD/CAD gains.
For derivative traders, this environment suggests that long positions in USD/CAD are favorable, despite the broader US dollar softening against other currencies. We should consider buying call options with strike prices above 1.4000, targeting the second half of the year when the rate cut differential between the two central banks is expected to be at its widest. This strategy allows for capturing potential upside while clearly defining the risk involved.
