USD/CAD fell for a second day on Thursday, moving away from a monthly peak set earlier in the week. It traded near 1.3665, down nearly 0.20% on the day, with losses limited ahead of US-Iran nuclear talks.
The US dollar weakened amid fresh uncertainty linked to US President Donald Trump’s trade policy. This followed a Supreme Court ruling against broad tariffs last Friday, after which Trump announced a new framework and kept the trade agenda in place.
Temporary Tariffs And Trade Uncertainty
On Wednesday, Trump said the White House moved to temporary global tariffs of 10% for 150 days under Section 122. He also said the administration is working towards raising duties to 15%, increasing concern about retaliation and supply chain disruption.
A positive tone in equity markets also reduced demand for the dollar as a safe-haven. Oil prices held near the weekly low after a large rise in US stock, though supply risk tied to possible US-Iran conflict offered support.
Lower oil prices gave limited support to the Canadian dollar, which is linked to commodities. This may restrain stronger selling in USD/CAD without clearer follow-through.
We are seeing the USD/CAD pair trade with a softer tone around 1.3450, reflecting ongoing uncertainty in the US dollar. This reminds us of the volatility experienced last year after the temporary 10% global tariffs were announced in early 2025. Those trade policy shifts have had lasting effects on inflation expectations for both countries.
Inflation And Central Bank Divergence
The lingering impact of those tariffs is now visible in the latest inflation figures. With US CPI holding at 3.1% and Canadian CPI slightly lower at 2.9%, traders are betting on a divergence in central bank policy. This slight inflation gap is fueling speculation that the Bank of Canada may need to consider easing policy sooner than the Federal Reserve.
This potential policy divergence is a key factor putting downward pressure on the pair. Markets are currently pricing in a 60% chance of a Bank of Canada rate cut by June, while expectations for a Fed cut have been pushed further into the third quarter. This outlook favors a weaker USD relative to the CAD in the medium term.
However, the commodity side of the equation is limiting the Canadian dollar’s strength. WTI crude oil is struggling to hold above $78 a barrel after the latest EIA report showed an unexpected build in US inventories of 3.5 million barrels. Subdued oil prices are acting as an anchor on the loonie, preventing a more aggressive sell-off in USD/CAD.
Looking at the options market, one-month implied volatility for USD/CAD sits near a low of 5.8%, suggesting traders do not expect explosive moves in the immediate future. Still, the risk reversal skew shows a slight bias towards CAD calls, indicating that options traders are quietly positioning for more strength in the Canadian dollar. This suggests that while spot price action is hesitant, the underlying sentiment favors a lower USD/CAD.
Given these conflicting signals, traders should consider strategies that benefit from a gradual decline in the pair. Buying out-of-the-money CAD call options offers a low-cost way to position for a drop in USD/CAD while defining risk. A cautious approach is warranted, as the weak oil market could easily cap any significant gains for the Canadian dollar.
