USD/CAD edged up to around 1.4230 on Wednesday after touching a more-than-one-year high of 1.4239 earlier in the session. The Canadian Dollar has been weighed down by softer oil prices, while the US Dollar has drawn support as markets increase bets on another Federal Reserve rate rise this year. Geopolitical risk also remains a factor after Iranian President Masoud Pezeshkian said Tehran’s ballistic missile programme would not be part of talks with the United States, and President Donald Trump disputed Iran’s claims on International Atomic Energy Agency inspections, leaving uncertainty over any agreement.
The US Dollar Index (DXY) traded near 101.60, close to its highest level in more than a year. Money markets priced nearly an 86% chance of a Fed hike by December, up from about 61% before last week’s Federal Open Market Committee (FOMC) meeting, and the central bank’s projections indicated a majority still see scope for higher rates this year. Focus now shifts to Thursday’s US Personal Consumption Expenditures (PCE) Price Index for May, the Fed’s preferred inflation gauge. In Canada, Bank of Canada (BoC) Governor Tiff Macklem pointed to global financial flow imbalances as a potential source of financial stability risk.
Diverging Monetary Policy Drives USD/CAD Higher
We see the current strength in USD/CAD, trading around 1.3850, as a trend with more room to run in the coming weeks. The core of this view is the diverging monetary policies of the Federal Reserve and the Bank of Canada. This policy gap is creating a clear opportunity that we believe will persist through the summer.
The latest US Consumer Price Index for May 2026 came in at 3.1%, surprising markets that were looking for a reading below 3%. This persistent inflation reinforces our belief that the Fed will hold interest rates steady, keeping the US Dollar supported. Derivative markets are now pricing out any chance of a rate cut before the fourth quarter, a significant shift from just a month ago.
In Canada, the story is quite different, with Bank of Canada Governor Rogers highlighting concerns over sluggish domestic demand in the bank’s last statement. Adding to this pressure, WTI crude has recently fallen below $75 a barrel, directly impacting the value of the commodity-linked Canadian Dollar. Historically, periods of sub-$80 oil, like we saw in late 2024, have corresponded with USD/CAD levels above 1.3700.
Yield Spreads And Safe-Haven Flows Bolster The US Dollar
The yield spread between the US 2-year Treasury and its Canadian equivalent has widened to over 60 basis points, its largest gap this year, which further attracts capital to the US. We are therefore favoring strategies that profit from a continued rise in USD/CAD, such as buying call options with expirations in late July or August. This allows traders to capitalize on the expected upward drift while defining their maximum risk.
Broader market uncertainty is also playing a role in the US Dollar’s strength. Ongoing trade friction between the US and the Pacific trading bloc continues to fuel safe-haven flows into the US Dollar. During such times, the Greenback tends to outperform currencies tied more closely to global growth, like the CAD.
