The Canadian dollar continues to spin its wheels against the US dollar, with USDCAD stuck just above 1.36 as markets wait for something strong enough to finally break the pair out of its recent range.
At first glance, easing tensions in the Middle East should be good news for the Canadian dollar.
Reports suggest the US has sent Iran a proposal aimed at reopening the Strait of Hormuz, with discussions tied to sanctions relief in exchange for limits on Iran’s nuclear program. Markets are cautiously hopeful the situation may continue cooling off in the coming days.
Normally, improving global sentiment weakens the US dollar as investors move money out of safe-haven assets and back into riskier markets.
But this time, things are a little more complicated for the Loonie.
The same headlines reducing demand for the US dollar are also weighing on oil prices — and that matters because oil remains one of the Canadian dollar’s biggest supports.
That has created a strange setup where both positive and negative geopolitical headlines can keep USDCAD relatively stable.
When tensions rise, the US dollar benefits from safe-haven demand while the Canadian dollar gets support from rising oil prices. When tensions ease, the USD loses some of that safe-haven appeal, but falling oil prices simultaneously take some momentum away from the Canadian dollar.
The result has been a lot of movement across global currency markets, but surprisingly little movement in USDCAD itself.
For most Canadians watching the exchange rate, the pair has basically been bouncing around between 1.36 and 1.37 without much conviction either way.
Still, markets may slowly be moving past the Iran story.
Reuters polling released this week showed analysts becoming slightly more bullish on the Canadian dollar over the next 12 months as geopolitical fears ease and safe-haven demand for the US dollar fades.
But there’s still a major issue hanging over the Canadian dollar: USMCA uncertainty.
While Middle East tensions may be calming down, investors remain cautious about upcoming USMCA negotiations and the broader direction of US-Canada trade relations. That uncertainty continues to limit enthusiasm for the Canadian dollar, even during periods where the US dollar weakens more broadly.
In other words, the market may be starting to believe the worst of the geopolitical panic is behind us — but it still isn’t fully convinced Canada is in the clear.
Tomorrow’s Canadian and US jobs reports could finally give USDCAD the catalyst it has been waiting for. If the data meaningfully shifts interest rate expectations between the Federal Reserve and the Bank of Canada, we could finally see the pair break out of its recent range.
Until then, the Canadian dollar remains stuck in the middle: fading geopolitical risk on one side and lingering USMCA uncertainty on the other.
