USD/CAD traded higher at about 1.3915 in early European hours on Tuesday. The US Dollar rose against the Canadian Dollar amid uncertainty over a US Tuesday deadline linked to possible military action against Iranian infrastructure if the Strait of Hormuz is not reopened.
Donald Trump said on Monday that Iran’s reply to a US ceasefire proposal, sent through intermediaries, was “not good enough”. He also warned of “complete demolition” of Iran’s power plants and bridges within hours if the Strait of Hormuz is not fully reopened by his deadline.
Middle East Tensions And Currency Drivers
Ongoing Middle East tensions supported demand for the US Dollar. At the same time, higher crude oil prices offered some support to the Canadian Dollar, as Canada is a major oil exporter and the currency often tracks oil moves.
In US data, the ISM Services PMI fell to 54.0 in March from 56.1 in February. The result was below the 55.0 forecast, pointing to slower growth in the services sector.
We remember the tensions in 2025 when the US set a deadline over the Strait of Hormuz, causing a significant but brief surge in the US Dollar. The market saw a classic safe-haven rush that pushed USD/CAD towards the 1.40 level, highlighting how geopolitical risk can temporarily overpower other factors. This kind of event serves as a reminder that headline-driven volatility can create sharp, short-term trading opportunities.
Although the situation eventually de-escalated, that period of uncertainty has left a lasting impact on the energy markets. We have seen West Texas Intermediate crude prices sustain levels above $88 per barrel through the first quarter of 2026, partly because the market remains sensitive to any supply disruption risk from the region. For the commodity-linked Loonie, this means that even as USD/CAD trades around 1.3650 today, any renewed Middle East tension provides underlying support for the Canadian currency.
Options Market Volatility Signals
The key lesson from that period was in the options market, where implied volatility on both oil and currency pairs saw a massive spike. The CBOE Crude Oil Volatility Index (OVX) touched multi-year highs above 50 during that week in 2025, a level it has not returned to since, now hovering in the mid-30s. Traders should therefore be prepared to buy volatility through instruments like straddles on USD/CAD when similar geopolitical deadlines emerge, as this strategy profits from a large price move regardless of the direction.
It is also important to contrast the economic backdrop of then versus now. The weaker US ISM Services PMI of 54.0 in March 2025 was largely ignored amid the crisis, but fundamentals eventually reasserted themselves once tensions faded. With US services data averaging a healthier 53.2 in the first quarter of 2026 and Canadian inflation proving sticky, the economic drivers for the currency pair are now more balanced than they were during that headline-driven period.
