Insights 
VT 
USD/CAD increased to nearly 1.3580 during the early Asian session on Tuesday. The US Dollar gained strength amid rising Middle East tensions, particularly the conflict involving Israel and Iran, which might broaden into a regional issue.
There is a focus on the US May Retail Sales data, expected later on Tuesday, which might influence the pair’s movement. The Canadian Dollar, meanwhile, could benefit from rising crude oil prices, given Canada’s role as a major oil exporter to the US.
US inflation data indicates a high likelihood of Federal Reserve interest rate cuts. Traders are anticipating a potential 80% chance of a rate cut in September, followed by another in October.
Factors Impacting The Canadian Dollar
Key factors impacting the Canadian Dollar include the Bank of Canada’s interest rate settings, oil prices, economic health, inflation, and the trade balance. Economic data such as GDP and employment figures are also crucial, as a strong economy attracts more investment and can lead to higher interest rates.
Higher oil prices are beneficial for the Canadian Dollar, as petroleum is Canada’s largest export. Inflation also plays a role, as rising inflation often leads to higher interest rates attracting capital inflows.
The earlier mover above 1.3580 in USD/CAD reflects a reaction mostly to outside drivers rather than anything domestic. Specifically, recent turmoil in the Middle East—especially escalation between Israel and Iran—has caused safe-haven demand to pick up globally, favouring the US Dollar in the process. With the situation under close international observation, early trading this week has been largely shaped by geopolitical risk appetite.
Tuesday’s US Retail Sales release for May is expected to offer concrete clues as to the current pace of consumer spending, which remains central to how monetary policy unfolds. If data surprises on the upside, we might see some pushback against rising support for policy loosening, particularly timed around September and October. However, with latest inflation prints pointing towards continued moderation, sell-side participants in rates markets are becoming increasingly confident that the Federal Reserve will move towards easing firmly in the second half of the year. This expectation has been priced into futures curves already, as seen in the more than 80% probability assigned to rate reductions this autumn.
On the northern side of the border, we know that the Loonie often moves in tandem with crude prices due to Canada’s resource-heavy export economy, where oil continues to hold considerable sway. Recent strength in energy markets, including both Brent and WTI benchmarks, has lent stratified support to CAD against G10 peers. But it’s not just about commodities. Domestic data—covering inflation, jobs, growth, and the country’s external account—remains under the magnifying glass. An uptick in GDP or tighter labour readings would justify further tightening or at the very least, delay loosening.
Potential Impacts Of Market Changes
The Bank of Canada, having already shown some willingness to diverge from the Fed in recent months, may find itself in a tricky spot. If oil stays firm and inflation doesn’t unwind as expected, Macklem and his team might pause further moves to the downside on interest rates. There’s little room for error in forward guidance now, especially with inflation breaching tolerable band limits earlier this year. Meanwhile, stronger retail numbers in the US, alongside hawkish rhetoric from the FOMC, could keep the pair top-heavy again.
In terms of trading positioning, watching energy markets will be just as important as tracking macroeconomic flows. Any unexpected drawdown in US inventories or fresh OPEC commentary may skew expectations for Canadian growth and hence impact rate speculation north of the border. With volatility re-entering markets after several months of relative calm, usual correlations might not behave well, so it makes sense to increase awareness around potential slippage or divergence.
More broadly, the current trend appears to still favour USD when risk-off dominates, given its reserve status and liquidity depth. But we’re also witnessing moments when oil-linked trades spark short bursts of CAD strength—these spells can quickly unwind if broader sentiment shifts again. Interest rate differentials and headline events need tracking at a more granular level now, rather than relying solely on broader trends.
We think relative yields across the front end, especially the 2Y spread, hold predictive value going forward. Traders could consider adding more sensitivity to those shifts in their short-term models. Attention should also be given to the tone of upcoming speeches from central bank officials. If dovish signals intensify from either side, it could tip the balance on expectations much sooner than official statements intend.
As we move deeper into the summer months, low liquidity sessions during regional holidays or between macro prints might exaggerate moves in this pair. Any spike in futures-implied volatility could offer clues about near-term hedging behaviour that’s not obvious from spot movement alone. Remaining adaptive and data-responsive is paramount now, particularly in a time when geopolitical shocks and price-sensitive algos are increasingly dictating short-term plays.
