USD/CAD fell for a fourth day on Thursday as the US Dollar weakened more broadly. The pair is down nearly 1% this week, touched a three-week low of 1.3713, then moved back above 1.3720.
Markets reacted to comments from US President Donald Trump that the US and Iran have “productive and ongoing” talks, with possible peace discussions resuming in the coming days. This reduced demand for the US Dollar as a safe haven.
Trump also repeated a threat to remove Federal Reserve Chair Jerome Powell if he does not leave when his term ends in May. Powell’s term as chair ends on May 15, while his Board term runs until January 2028.
Powell has said he will remain in charge until a criminal investigation into alleged fraud ends. The case could delay Senate confirmation of a successor, named as Kevin Warsh, for several weeks.
Canada has few major releases this week. US releases due include the Philadelphia Fed Manufacturing Survey for April, Industrial Production for March, and speeches from New York Fed President John Williams and Board member Stephen Miran.
The Federal Reserve aims for price stability and full employment, and has an inflation target of 2%. It holds eight policy meetings a year; its committee has 12 officials.
Quantitative easing (QE) increases bond buying and often weakens the US Dollar. Quantitative tightening (QT) reduces bond support and is usually positive for the US Dollar.
We remember this time last year, in April 2025, when optimism surrounding the Iran peace talks caused a significant dip in the US Dollar. The market was selling the dollar on hopes of de-escalation, pushing USD/CAD down towards the 1.3700 handle. This was compounded by uncertainty at the Federal Reserve, as political pressure mounted on Chairman Powell ahead of his term ending in May 2025.
That narrative played out as expected, with a resolution in the Middle East and a contentious but eventual transition at the Fed causing volatility through the summer of 2025. The shift away from safe-haven assets drove the USD/CAD pair down to a low of 1.3350 by last autumn. Now, however, the environment has changed completely, and we are looking at a different set of drivers.
Today, the primary focus is the growing policy divergence between the US and Canada, driven by stubborn inflation data. The latest US Consumer Price Index came in hotter than expected at 3.5%, while Canada’s CPI is trending lower at 2.9%. This suggests the Federal Reserve will hold interest rates higher for longer than the Bank of Canada, which is a bullish signal for the US Dollar.
Given this backdrop, traders should consider using options to position for renewed US Dollar strength against the Canadian Dollar. With the VIX volatility index trading at a relatively low 14.6, buying USD/CAD call options offers a defined-risk way to bet on a move back towards the 1.3800 level seen earlier this year. These cheaper options provide upside exposure if the interest rate differential continues to widen in favor of the US.
Another factor to watch is the price of oil, which has been supporting the Canadian currency with WTI crude holding above $85 per barrel. However, we believe the powerful theme of central bank policy will ultimately overwhelm oil’s influence in the coming weeks. Therefore, selling out-of-the-money puts on USD/CAD could be a strategy to collect premium while expressing the view that a significant drop below 1.3500 is unlikely.
