The Canadian Dollar rose against most major peers in Thursday’s European session, but not against the US Dollar. WTI oil traded 8% higher at about $102.00, supporting currencies linked to oil exports such as Canada’s.
Donald Trump said the US would “hit Iran extremely hard over the next two to three weeks”. The comments raised concerns about damage to Gulf energy sites and longer oil supply disruptions.
Oil Supply Risk And The Loonie
The Strait of Hormuz carries almost 20% of global oil supply. Emmanuel Macron said reopening the passage without military action is difficult.
Demand for safe-haven assets increased, helping the US Dollar. The US Dollar Index (DXY) was up 0.6% near 100.15.
The Canadian Dollar is influenced by Bank of Canada (BoC) interest rates, oil prices, economic growth, inflation, and Canada’s trade balance. It is also affected by global risk appetite and the state of the US economy, Canada’s largest trading partner.
The BoC aims to keep inflation in a 1–3% range by changing interest rates. It can also use quantitative easing or tightening to affect credit conditions.
How Oil And Policy Shape Cad
Oil is Canada’s biggest export, so higher oil prices can lift the CAD and support the trade balance. Economic data such as GDP, PMIs, jobs, and sentiment can also move the currency.
With oil prices surging above $100 per barrel on geopolitical threats, we see the Canadian dollar strengthening significantly against most currencies. However, the US dollar is also attracting safe-haven bids, creating a tense balance in the widely traded USDCAD pair. This suggests the most straightforward opportunities may lie in other currency pairings.
The direct link between crude oil and the loonie is a primary focus, as energy products remain Canada’s largest export. Looking back, we saw a similar dynamic during the energy price shock of 2022, where the CAD showed notable resilience. With Canada’s net petroleum exports recently averaging over $30 billion per quarter, the currency is set to benefit from sustained higher prices.
At the same time, the US Dollar Index has pushed above the 100 mark, showing that traders are seeking safety amidst the turmoil. This flight to quality is capping the Canadian dollar’s advance against its US counterpart. Therefore, we believe shorting USDCAD carries significant risk, as any escalation could boost the greenback even further.
The stated two-to-three-week timeline for potential conflict has caused a spike in near-term implied volatility for currency options. We should consider strategies that benefit from these price swings, as the market is pricing in sharp movements. This environment is less suited for simple directional bets and more for positions that can profit from uncertainty itself.
Furthermore, we must watch for the Bank of Canada’s reaction, as this oil surge will fuel inflationary pressures. Canada’s latest CPI reading was already near the top of the central bank’s target range before this event. A more aggressive monetary policy stance from the BoC would provide a secondary, powerful tailwind for the Canadian dollar.
Given these factors, we see the most potential in positioning for CAD strength against the currencies of oil-importing nations, such as the Japanese Yen or the Euro. These pairs, like CADJPY, isolate the CAD’s commodity-driven strength without the competing safe-haven demand that is supporting the US dollar. Derivative positions should be structured to take advantage of this clear divergence over the coming weeks.
