USD/CAD rose on Tuesday, with the Canadian dollar down for a seventh straight day. The pair traded near 1.3960, close to its highest level since December 2025.
The US Dollar Index was near 100.17 after earlier reaching 100.64, a ten-month high. The move lower in the dollar followed a pullback after the earlier rise.
Geopolitical Risk And Market Reaction
A report said Donald Trump was willing to end the US military campaign against Iran even if the Strait of Hormuz stays largely closed. Iran’s Islamic Revolutionary Guard Corps said it could target US companies in the region from April 1.
The Canadian dollar has stayed weak since the US-Israel war with Iran began and energy prices rose. Canada exports oil, but higher energy costs can reduce domestic demand and slow growth.
Canada’s GDP rose 0.1% month on month in January after 0.2% previously, while estimates show 0.2% growth in February. The Bank of Canada’s January report projected 1.8% growth.
Markets are pricing at least two Bank of Canada rate hikes by year-end. In the US, JOLTS openings fell to 6.882 million in February from 7.24 million, and consumer confidence rose to 91.8 in March from 91 in February, above the 87.9 forecast.
We see the USD/CAD pair in a strong uptrend, now challenging the 1.4000 level for the first time since late 2025. This move is happening even as the US Dollar Index pulls back slightly, which highlights significant weakness in the Canadian dollar. The primary driver remains the geopolitical situation, with WTI crude oil prices recently spiking to over $115 a barrel, a level not sustained since the energy crisis of 2022.
Options Volatility And Policy Divergence
While high oil prices would normally help the Loonie, the market is treating this surge as a tax on the global and Canadian consumer. We see this concern reflected in recent data, as Canada’s unemployment rate ticked up to 6.1% in the latest report, reinforcing the idea of underlying economic softness. This creates a difficult situation for the Bank of Canada, as headline inflation is rising but core measures, excluding energy, are more contained around 2.5%.
For derivative traders, this tension is creating opportunity in the options market, where one-month implied volatility for USD/CAD has jumped to a 12-month high. This suggests traders are pricing in a significant move but are divided on the direction, making strategies like long straddles potentially attractive for those betting on a breakout. The key risk is the April 1st deadline set by Iran, which could trigger a sharp move and further increase safe-haven demand for the US dollar.
We are watching for any sign of policy divergence between the Bank of Canada and the US Federal Reserve. While futures markets are pricing in a 75% chance of a BoC rate hike by July to combat oil-driven inflation, the Fed’s path is less clear given cooling US job openings. If the BoC hesitates due to the weak domestic economy, the Canadian dollar could fall much further.
This situation is reminiscent of early 2025 when initial fears of a global slowdown also weighed on the Loonie, causing it to disconnect from oil price movements temporarily. Back then, the CAD eventually recovered as those fears subsided. Traders should remain cautious, as the current geopolitical risks are much higher, suggesting this disconnect could last longer.
