USD/CAD fell for a second straight session, trading near 1.4200 in Asian hours on Friday, as the commodity-linked Canadian Dollar gained support from firmer oil prices. Crude advanced after a suspected projectile attack on a cargo vessel near Oman disrupted United Nations evacuation efforts in the Strait of Hormuz and revived concerns over global energy supply.
The situation escalated after Thursday’s close when two US officials said Iranian forces had fired on the ship while it was transiting the strait, and Iranian authorities warned that the security of vessels operating outside designated Hormuz routes was no longer assured. Still, losses in USD/CAD were capped as the US Dollar drew support from expectations of tighter Federal Reserve policy: CME FedWatch shows a 63.4% probability of a rate rise at the 15–16 September meeting. Inflation data also underpinned the greenback, with headline PCE at 4.1% year-on-year in May versus 3.3% in April, while core PCE rose to 3.4% from 3.3%.
Competing Dollar Drivers: Oil And Fed Policy
We see the USD/CAD pair caught in a tug-of-war around the 1.4200 level as of June 26, 2026. The Canadian dollar is drawing strength from soaring oil prices, which have been pushed higher by new geopolitical risks in the Strait of Hormuz. This is being directly countered by a strong US dollar, as markets increasingly expect a Federal Reserve rate hike in September.
The support for the Canadian dollar is substantial, with West Texas Intermediate (WTI) crude oil now trading above $95 a barrel following the recent shipping attack near Oman. This situation is further tightened by last week’s EIA report showing a larger-than-expected drawdown in US crude inventories, reinforcing the bullish case for oil. As Canada is a major oil exporter, this provides a strong fundamental floor for the CAD.
Market Outlook: Volatility Favoured Amid Uncertainty
On the other side, the case for a stronger USD is building due to stubborn US inflation, with the latest Core PCE data holding firm at 3.4%. The 63.4% probability of a September rate hike shown in the futures market reflects a conviction that the Fed must act. All eyes are now on the upcoming July jobs report to either confirm or challenge this hawkish outlook.
This fundamental conflict makes predicting direction difficult, and we believe the best response is to trade the expected increase in volatility itself. One-month implied volatility for USD/CAD has already risen to a three-month high, showing that the options market is bracing for a significant price move. We view long volatility strategies, such as purchasing a straddle or strangle, as a prudent way to position for a potential breakout in either direction in the coming weeks.
