USD/CAD recovered from Wednesday’s drop and moved back above 1.3900 on Thursday. It bounced from around 1.3865 and traded near 1.3910, with the year-to-date high at 1.3966 in view.
Market caution increased after a televised speech by US President Donald Trump on the Iran war. He gave no deadline for the end of the conflict and said the US Army would hit Iran “extremely hard” in the next two or three weeks.
Geopolitical Risk Drives Market Caution
Trump also urged allies to help reopen the Strait of Hormuz, which Iran has kept closed since the war began on February 28. The closure has lifted crude prices and raised recession concerns.
Equity markets fell, with Asian shares down and European and Wall Street futures pointing to losses. Oil prices rebounded after two days of declines, while the US Dollar strengthened against major currencies.
US data on Wednesday beat forecasts. ADP Employment Change rose by 62K in March versus 40K expected, Retail Sales increased 0.6% in February after a 0.1% January fall, and the ISM Manufacturing PMI was 52.7, its best in nearly 4 years.
Canadian data was weaker, with the S&P Global Manufacturing PMI easing to 50 in March from 51 in February. This supported concerns about the war’s economic effect.
Historical Parallel From Early 2025
We should recall the events of early 2025 as a guide for the current market environment. Back then, a sharp escalation in Mideast tensions, coupled with diverging economic data, sent USD/CAD soaring toward 1.4000. This historical precedent highlights how quickly geopolitical risk can shift currency valuations.
The current nervousness surrounding naval patrols near the Strait of Hormuz feels very similar to the sentiment we saw in March of 2025. Given that backdrop, traders should consider buying USD/CAD call options to position for a potential repeat of last year’s rally. This strategy offers upside exposure to a strengthening US dollar while capping the maximum loss at the premium paid.
Market data already reflects this growing anxiety, as one-month implied volatility for USD/CAD has climbed from 5.8% to 7.1% over the last two weeks. This indicates that options are becoming more expensive as traders increasingly price in the risk of a large price swing. Therefore, acting sooner rather than later could be advantageous.
This view is reinforced by the latest economic releases, which echo the divergence we saw in 2025. The recent US jobs report showed a robust addition of 215,000 payrolls, while Canada’s latest monthly GDP figure unexpectedly contracted by 0.2%. This fundamental weakness in Canada against US strength provides a solid foundation for a higher USD/CAD exchange rate.
To manage the rising cost of options, using a bull call spread is a prudent alternative. By selling a higher-strike call against a purchased call, we can reduce the initial cash outlay, though it does cap the potential profit. Meanwhile, Canadian exporters with future US dollar receivables should look at locking in the current favorable rate using forward contracts.
We must also watch crude oil, which is currently trading nervously around $87 per barrel for WTI. In 2025, the closure of the Strait of Hormuz caused an oil shock that damaged the global economy and hurt the commodity-linked Canadian dollar. Any sign of escalating conflict could trigger a similar dynamic, further fueling a USD/CAD rally.
