After sliding to four-month lows earlier this week, the Canadian dollar (CAD) has bounced back on Wednesday morning as global markets flipped from fear to optimism almost overnight, following President Trump’s comments which gave the clearest indications yet that the U.S. will be ending military operations against Iran in the next two to three weeks.
Since the beginning of the conflict over two weeks ago, USD/CAD has been steadily grinding higher toward the 1.39 level. This reversal feels a bit jarring, but it’s not happening in a vacuum.
The Canadian dollar has been stuck in a tough spot. Rising geopolitical tensions pushed investors into the U.S. dollar (USD) as a safe haven, dragging the CAD lower even as oil prices tried to offer some support. That’s a classic setup. When uncertainty spikes, money flows into USD and away from risk-sensitive currencies like the Canadian dollar. But now, the tone has shifted.
Markets turned sharply higher after comments suggesting the U.S. could step back from the conflict relatively soon. Equity markets surged globally, and that “risk-on” mood has taken some of the pressure off the loonie. At the same time, the U.S. dollar has pulled back from its recent highs, giving currencies across the board, including the Canadian dollar, room to recover.
USD/CAD has followed that move, dropping from recent highs near 1.39 back toward the high 1.38 range. The Canadian dollar has gained roughly a cent from its worst levels this week.
That said, the Canadian dollar is still lagging.
Compared to other major currencies, the Canadian dollar hasn’t rallied as strongly. While the euro, pound, and other G10 currencies have surged on the shift in sentiment, the loonie’s gains have been more modest. That underperformance tells you something important. This isn’t a full recovery story yet.
Why is the Canadian dollar still underperforming?
It comes down to a mix of conflicting forces.
First, oil prices. Canada is a major energy exporter, so higher oil prices usually support the Canadian dollar. But right now, energy markets are caught between two narratives. On one hand, geopolitical tensions should push oil higher. On the other, if the conflict de-escalates quickly, those risk premiums can fade just as fast.
Second, global risk sentiment. The Canadian dollar tends to do well when markets are stable and growing. The recent bounce in equities helps, but it’s being driven more by headline relief than by strong economic fundamentals. That’s a fragile foundation.
Third, the strength of the U.S. dollar. Even with the recent pullback, the USD still has strong underlying support from solid U.S. economic data. Retail sales and employment numbers have come in stronger than expected, which would normally push the dollar higher. The fact that it didn’t tells you just how dominant the geopolitical story is right now.
What’s next for the Canadian dollar and USD/CAD?
At this point, everything hinges on headlines and President Trump’s much anticipated prime-time speech on Wednesday night.
If the U.S. follows through on stepping back from the conflict and tensions ease meaningfully, we could see USD/CAD push lower toward the 1.37 to 1.38 range. That would be a more traditional setup with improving risk sentiment, a softer USD, and a Canadian dollar that starts to catch up.
But if the situation drags on, or if key risks like the Strait of Hormuz remain unresolved, volatility will likely remain elevated. In that scenario, the Canadian dollar could struggle to build on its recent gains.
Bottom line for the Canadian dollar
The Canadian dollar isn’t out of the woods. It’s just getting a breather.
Right now, it’s being pulled in two directions: improving market sentiment on one side, and lingering geopolitical and economic uncertainty on the other. Until one of those forces clearly wins, expect more choppy, headline-driven moves in USD/CAD.
For now, all eyes remain on Iran — and what happens next could set the tone for the Canadian dollar in the days ahead.
The Canadian dollar is currently trading at 1.3665 CAD against the US Dollar.
