USD/CAD extended its advance for a third session, trading near 1.4210 in European hours on Tuesday as the US Dollar stayed firm on renewed tensions in the Strait of Hormuz. Gains were tempered by expectations that the Federal Reserve will not raise rates this month or in September after a softer employment report showed fewer jobs added in April, May and June than forecast. Oil’s recent pullback, attributed to an OPEC+ supply increase and a US–Iran peace deal, also reduced perceived inflation pressure and eased the case for a more hawkish Fed stance.
The pair’s upside was further constrained by support for the commodity-linked Canadian Dollar via oil prices, though lower crude can reduce foreign capital inflows to Canada and weigh on the loonie. WTI traded around $69.40 a barrel after prior-day losses, helped by reports that Iran fired at least two missiles at commercial vessels in the waterway; two ships were damaged but there were no casualties. UK Maritime Trade Operations said a southbound tanker was hit on its port side by an unknown projectile, triggering a fire, while the Bank of Canada’s 1–3% inflation target and its use of quantitative easing or tightening remain key CAD drivers.
Safe-Haven Flows and Fragile Dollar Strength
We are watching the USD/CAD pair closely as it pushes above 1.4200, driven by conflict in the Strait of Hormuz. This tension is creating a classic safe-haven bid for the US Dollar. However, we see this strength as fragile and likely event-driven in the short term.
The underlying case for a weaker US Dollar remains intact, limiting any significant rally. Recent US Nonfarm Payrolls reports for the second quarter have consistently undershot expectations, averaging around 175,000, which has solidified the market view against further Fed rate hikes. The CME FedWatch Tool now indicates less than a 5% probability of a rate increase before the end of the year, a stark contrast to previous forecasts.
Outlook and Option Strategies Amid Geopolitical Volatility
Meanwhile, the Canadian Dollar is caught in a tug-of-war. The missile attack has pushed WTI crude oil prices towards $70 a barrel, which should be supportive for the loonie. Yet, the risk-off sentiment is simultaneously boosting the US Dollar, effectively neutralizing the positive impact from higher energy prices on the CAD.
Given these conflicting signals, we are not taking a strong directional view on the pair. The heightened geopolitical risk suggests an increase in volatility is the most probable outcome in the coming weeks. Historical data from similar flare-ups in the Middle East shows that initial currency spikes can reverse quickly once the immediate threat is contained or clarified.
Therefore, our strategy will focus on options to capitalize on this expected choppiness. We are considering buying strangles, which would profit from a significant price move in either direction, whether that’s a sharp escalation pushing USD/CAD towards 1.4400 or a sudden de-escalation that sends it back below 1.4000. This approach allows us to position for a breakout from the current range without betting on the specific direction.
