USD/CAD stayed under pressure for a third straight session, trading near 1.4190 in Asian hours on Monday as the US Dollar eased after reports that Washington and Tehran agreed to stop attacking each other ahead of peace talks in Doha this week. The FX market remained headline-driven as traders weighed regional stability and broader risk sentiment. The pause followed retaliatory strikes that began on Thursday after an Iranian projectile hit a cargo vessel, with both sides accusing the other of breaching a June 17 interim ceasefire; official delegations are due to meet in Qatar on Tuesday to negotiate an end to the conflict.
Downside in the Greenback was tempered by hawkish Federal Reserve expectations. CME FedWatch shows a 59.7% probability of a rate hike as soon as September 2026, while this week’s US labour data culminate in Thursday’s Nonfarm Payrolls report, with forecasts for June job growth of 114,000 and unemployment unchanged at 4.3%. The Canadian Dollar faced an additional headwind from softer crude, given Canada’s role as a major exporter; WTI was around $69.80, after prices fell on a Reuters report that the US and Iran would pause hostilities in the Gulf and reopen talks over the Strait of Hormuz.
Geopolitical Easing and Oil Market Dynamics
Given the diplomatic developments between Washington and Tehran, we are seeing a temporary decrease in risk aversion, which is weighing on the US Dollar. This has pushed USD/CAD lower, but we view this as a fragile situation. The upcoming peace talks in Doha on Tuesday are a major inflection point, and any breakdown could quickly reverse the recent trend.
This geopolitical easing has directly impacted oil prices, with West Texas Intermediate falling below $70 a barrel. Recent data from the Energy Information Administration showing an unexpected crude inventory build of 2.1 million barrels has only added to this downward pressure. Since Canada is a major oil exporter, this weakness in crude is a direct headwind for the Canadian Dollar, limiting its ability to gain against the greenback.
Central Bank Divergence and Market Strategy
From our perspective, the most significant driver in the coming weeks will be the divergence in central bank policy. While the Bank of Canada is likely to remain on hold with recent domestic CPI figures holding steady at 2.5%, the US Federal Reserve is signaling a different path. The market is currently pricing in a nearly 60% chance of a Fed rate hike by September, a probability that will be heavily influenced by this Thursday’s Nonfarm Payrolls report.
Therefore, we see the current dip in USD/CAD as a potential opportunity, but one fraught with event risk. We are considering buying short-term volatility through options, such as a straddle, ahead of the NFP data release on Thursday. If the US jobs number comes in strong, reinforcing the Fed’s hawkish stance, the support for the US Dollar could easily overwhelm the current geopolitical sentiment.
In the weeks ahead, we will be closely watching the spread between US and Canadian government bond yields, as this often reflects the anticipated policy divergence. Historically, a widening spread in favor of the US has led to sustained USD/CAD strength. Any failure in the Doha talks would likely see oil prices and risk aversion spike, creating a complex scenario where both the USD and CAD could strengthen, leading to choppy range-bound trading.
