The Canadian dollar weakened against the US dollar on Monday as renewed Middle East tensions supported the greenback. USD/CAD traded around 1.3834, up nearly 0.27% on the day. Iran’s semi-official Tasnim News Agency said Tehran had suspended negotiations with Washington over Israel’s military operations in Lebanon against Hezbollah, and reported a vow to fully block the Strait of Hormuz. After comments from US President Donald Trump, the US Dollar Index (DXY) pared intraday gains and traded near 99.16, having touched about 99.39, while still up nearly 0.25%. The loonie also faced pressure after weak Canadian GDP data last week; Bank of Canada Senior Deputy Governor Carolyn Rogers said two quarters of annualised GDP decline meets one recession definition. In the US, inflation remains above the Federal Reserve’s 2% target, supporting expectations for higher-for-longer rates. In data, the ISM Manufacturing PMI rose to 54 in May from 52.7, its highest since May 2022, while Canada’s S&P Global Manufacturing PMI slipped to 52.9 from 53.3. Markets now await US and Canadian labour market releases due on Friday. —

Safe Haven Flows and Geopolitical Risks Drive USD Strength

Given the renewed tensions in the Middle East, we see the US Dollar strengthening as a safe-haven asset. The USD/CAD is pushing past 1.3800, and this trend is likely to continue if geopolitical risks remain elevated. We must monitor any developments related to the Strait of Hormuz, as this is a critical chokepoint. Historically, threats to the Strait of Hormuz, through which about 21% of global petroleum liquids consumption passes, cause significant spikes in oil prices and market volatility. While higher oil prices can sometimes support the Canadian Dollar, the current flight to safety is overwhelmingly favoring the US Dollar. This dynamic is overpowering the typical petro-currency correlation for the CAD. —

Central Bank Divergence and Strategic Positioning

We are positioning for a continued divergence between the Bank of Canada and the US Federal Reserve. With recent Canadian data showing a technical recession and core inflation easing to 2.5%, the BoC has little reason to be aggressive. In contrast, the US Core PCE remains stubbornly above 3%, and the strong ISM manufacturing print reinforces the Fed’s “higher for longer” stance. The economic data further supports a bullish view on USD/CAD. The latest US Non-Farm Payrolls report added a solid 210,000 jobs, while Canada’s last labour force survey showed a gain of only 12,000, barely keeping up with population growth. This week’s upcoming jobs data will be critical, and we anticipate it will confirm this pattern of US strength versus Canadian sluggishness. In response, we are buying short-term USD/CAD call options to profit from a potential move higher. Specifically, we are looking at July expiry contracts with a strike price around 1.3950, which offers a cost-effective way to gain upside exposure. This strategy allows us to define our risk while capitalizing on the current momentum. The uncertainty also means implied volatility is on the rise, making options more expensive but also presenting opportunities. We see value in strategies that benefit from sharp price movements, regardless of direction, if the situation escalates unpredictably. For now, the clearest path appears to be further CAD weakness against the USD. For those with commercial exposure, such as businesses earning in Canadian dollars but paying costs in US dollars, this is a critical time to hedge. We are advising clients to use forward contracts to lock in an exchange rate for future payables. Using options collars can also protect against downside risk while retaining some potential to benefit if the CAD unexpectedly strengthens.

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