USD/CAD remained under pressure on Friday, with the Canadian Dollar supported by firmer Oil prices even as the US Dollar steadied. The pair traded near 1.4022, close to a one-month low, and was set for a second straight weekly decline. Oil climbed nearly 12% this week as fighting between the US and Iran disrupted energy shipments through the Strait of Hormuz, a backdrop that tends to underpin the Loonie given Canada’s status as a major Crude Oil exporter.
Rising energy costs have also revived inflation concerns and complicated the outlook for major central banks. The Bank of Canada kept its policy rate at 2.25%, while lifting its 2026 inflation forecast to 2.5% from 2.3%, and it sees inflation returning to the 2% target by early 2027. In the US, softer inflation data initially weighed on the Greenback, though Oil-driven price fears later supported expectations for a Federal Reserve rate hike later this year. The US Dollar Index (DXY) traded around 100.83 after touching 100.35 on Wednesday, its lowest level in more than three weeks.
Trading Strategies Amid Geopolitical and Energy Market Volatility
We recommend that derivative traders position themselves for increased volatility in the USD/CAD pair as geopolitical conflicts in the Strait of Hormuz continue to shake up global energy markets. With crude oil prices surging nearly 12% this week and Brent crude testing the $88-a-barrel range, the Canadian Dollar is finding strong short-term backing. To capitalize on this CAD momentum, we suggest looking at short-term USD/CAD put options near the 1.4000 support level.
However, we must remain cautious because the US Dollar Index (DXY) is holding steady around 100.83, buoyed by fears that expensive oil will force the Federal Reserve to hike rates. Historically, sudden energy shocks trigger safe-haven flows into the US Dollar, which can quickly erase any commodity-driven gains for the Loonie. To manage this risk, traders should consider using cost-effective risk reversals, buying USD/CAD call options while funding them by selling out-of-the-money puts.
Policy Decisions and the Canadian Dollar Outlook
The Bank of Canada’s decision to hold its policy rate at 2.25% and raise its 2026 inflation outlook to 2.5% shows they are ready to keep policy tight. By removing their previous bias toward interest rate cuts, policy makers have given the Canadian Dollar a more solid floor. We believe selling USD/CAD call options with strike prices above 1.4150 is a smart way to collect premium, as this level should act as a strong ceiling in the weeks ahead.
