USD/CAD rose at the start of the week, reversing much of Friday’s fall to around 1.3625, a near two-week low. It traded near 1.3665–1.3670 in Asia, up 0.15% on the day.
The US dollar reached its highest level since 23 January after US and Israeli strikes on Iran over the weekend. This increased risk aversion and boosted demand for traditional safe-haven assets, including the US dollar.
Middle East Tensions And Safe Haven Flows
Iran attacked several ships in the Strait of Hormuz, raising concerns about short-term disruption to oil supply. Oil climbed to its highest level since June 2026, which supported the Canadian dollar and limited further USD/CAD gains.
Given the fresh geopolitical tensions, we are seeing a classic tug-of-war in the USD/CAD. The demand for the safe-haven US Dollar is pulling the pair higher, while soaring oil prices are supporting the Canadian loonie, creating a ceiling. This conflict makes straightforward directional bets risky in the immediate term.
This setup suggests that volatility is the main trade to consider over the next few weeks. Implied volatility on one-month USD/CAD options has already surged to 9.8%, a significant jump from the 6.5% average we saw for most of 2025. We can look at strategies like buying straddles or strangles, which profit from a large price move in either direction, without having to guess the outcome of the Middle East conflict.
Traders should also look directly at the source of the pressure, which is the price of oil. With WTI crude futures for April delivery pushing past $97 a barrel, a level not seen since the supply concerns of mid-2024, buying call options on oil offers direct exposure to any further escalation. This acts as a good hedge or a speculative play on the situation worsening in the Strait of Hormuz.
Central Banks And Market Positioning
The central banks also anchor our expectations, potentially limiting how far the currency pair can run. The Bank of Canada will be hesitant to cut interest rates with inflation pressures from high energy prices, providing a floor for the CAD around the 1.3600 level. Similarly, the Federal Reserve’s data-dependent stance could cap extreme USD strength if upcoming US employment numbers, due this Friday, come in softer than expected.
The options market shows that traders are positioning for a sharp move higher more than a collapse. The one-month risk reversal, which measures the cost of calls versus puts, now shows a clear premium for USD calls. This tells us the market is more concerned about a sudden flight-to-safety event that would overwhelm the support from oil prices.
