USD/CAD fell for a third straight session, trading near 1.3770 in Asian hours on Friday, as the commodity-linked CAD drew support from firmer crude oil. Oil rose on escalating US-Iran tensions centred on the Strait of Hormuz, after Washington signalled fresh steps to restrict Iran’s economy, with formal details due on Monday. The proposed measures would target banks, businesses, shipping registries, cash transfers and smuggling operations, aiming to cut Tehran off from global commercial and financial networks.
The CAD also gained on broad USD softness and signs of progress on US-Canada trade, while Scotiabank said the currency’s 0.3% rise was second only to the NZD among major peers. Still, USD/CAD downside may be capped as US Treasury yields pushed higher again at the long end despite a bond buyback programme; Treasury Secretary Scott Bessent also said debt buybacks could exceed $4 billion per issue. In Canada, the BoC targets inflation of 1-3% via interest rates, and oil trends remain a key driver given petroleum’s role in exports and the trade balance.
Trading Strategies and Market Catalysts
We advise derivative traders to lean into short USD/CAD positions over the coming weeks as the pair tests support near the 1.3770 level. This bearish momentum is heavily backed by the Canadian Dollar’s recent 0.3% intraday gain, making it one of the strongest performing major currencies this session. With West Texas Intermediate (WTI) crude oil prices climbing back toward the $78 to $80 range, the commodity-linked Loonie has strong fundamental support to extend its gains.
The primary catalyst to watch is the upcoming US announcement on Monday, August 24, which will detail a massive economic campaign targeting Iran’s commercial networks. We expect this “economic D-day” to trigger heightened volatility in energy derivatives, potentially pushing crude prices higher if threats to the Strait of Hormuz intensify. Traders can exploit this looming volatility by purchasing short-term call options on crude oil or utilizing CAD-funded cross-currency swaps.
Risks and Opportunities For USD/CAD Trades
However, we must remain cautious as rising US Treasury yields, with the 10-year yield hovering around 3.9%, continue to provide a solid floor for the US Dollar. Treasury Secretary Scott Bessent’s hint at aggressive debt buybacks exceeding the planned $4 billion per issue could steepen the yield curve and trigger sudden greenback rallies. Consequently, we suggest using limited-risk strategies like bear put spreads on USD/CAD to capture the downside while hedging against bond market swings.
On the Canadian side, steady progress on US-Canada trade negotiations is actively reinforcing the Loonie’s resilience. With Canada’s crude exports remaining a crucial pillar of its trade balance, the domestic currency is well-positioned to outperform. We recommend closely monitoring upcoming Bank of Canada interest rate guidance alongside US manufacturing data to fine-tune entry points for short USD/CAD positions.
