USD/CAD stayed weak for a second day and traded near 1.3790 in Asian trading on Tuesday. The move came as the US Dollar lost ground after reports that the US and Iran may hold more talks before a two-week truce ends.
US President Donald Trump said Iran had made contact and was seeking to resume negotiations. Vice President JD Vance said diplomatic efforts were continuing and referred to weekend talks as constructive.
Dollar Pressures From Fed And Geopolitics
The US Dollar also eased as markets reduced expectations of further Federal Reserve tightening. This followed lower inflation concerns linked to a possible longer-term ceasefire and a possible reopening of the Strait of Hormuz, which has weighed on oil prices.
Fed Governor Stephen Miran said the Iran-related energy shock has not yet changed long-term inflation expectations. He said he expects price pressures to return to the central bank’s target within a year.
Falls in USD/CAD may be limited because lower oil prices can weigh on the Canadian Dollar. Canada is the largest crude exporter to the United States, and oil slipped as supply worries eased on the talk reports.
In Canada, CBC News reported that Prime Minister Mark Carney won a parliamentary majority on Monday. His Liberals secured 172 seats in the 343-seat House of Commons.
Strategy Focus On Volatility
Given the conflicting pressures on both the US and Canadian dollars, we see the recent stability in USD/CAD around 1.3790 as a sign of market indecision. A directional bet right now is risky, so the focus in the coming weeks should be on volatility. The easing of US-Iran tensions is pulling the pair in two different directions at once.
The drop in oil prices is a significant headwind for the Canadian dollar, and we must not underestimate it. Looking back, we saw WTI crude futures fall from over $90 in late 2025 to around $82 today on the prospect of a more stable supply from the Middle East. Since Canada’s economy is sensitive to energy exports, this price drop puts a natural cap on any loonie strength.
On the other hand, the US dollar’s weakness may be temporary, as markets are pricing in a less aggressive Federal Reserve too quickly. The latest US Consumer Price Index data from March showed inflation is still stubborn at 3.5%, making it unlikely the Fed will rush to cut rates. The interest rate differential, with the Fed Funds Rate at 5.5% and the Bank of Canada’s rate at 5.0%, still favors holding US dollars.
This environment suggests that USD/CAD may remain range-bound, caught between those competing forces. Derivative traders should consider strategies that profit from this lack of direction, such as selling strangles or establishing iron condors. Implied volatility for currency pairs has compressed in recent days, reflecting the current uncertainty and making these premium-selling strategies attractive.
The new majority for Prime Minister Carney’s government in Canada does introduce an element of political stability, which could provide some underlying support for the CAD. This reinforces our view that the pair is unlikely to experience a major breakout in either direction without a new catalyst. We will be closely watching upcoming inflation reports from both countries to see if the interest rate narrative shifts.
