USD/CAD traded around 1.3685 on Friday, marking a decline of 0.12% for the day, as the US Dollar weakened and oil prices rose, supporting the Canadian Dollar. The US Dollar Index (DXY) fell by 0.17% to 98.65, reflecting improved market sentiment after signs of de-escalation in tensions between the United States and Iran. Specifically, Iran's foreign minister Seyed Abbas Araghchi was reported to be traveling to Islamabad for a second round of peace talks with the US, which contributed to reduced demand for safe-haven assets and a softer Greenback. Despite ongoing risks related to the Strait of Hormuz and energy flows, hopes for renewed diplomatic talks have bolstered risk-sensitive assets like the Canadian Dollar [1].
The Canadian Dollar also benefited from higher energy prices, a key factor for the Canadian economy. TD Securities analysts expect the Bank of Canada to incorporate significantly higher oil price assumptions in its upcoming Monetary Policy Report, with West Texas Intermediate (WTI) US Oil projected around $85. This would represent a sharp increase from previous estimates and could temporarily push inflation toward 3% in the second quarter of the year [1].
On the monetary policy front, Commerzbank analysts anticipate the Federal Reserve will maintain a cautious stance in the near term, keeping rates unchanged within the 3.50%-3.75% range. However, rate cuts are still expected later in the year, which could continue to weigh on the US Dollar. Scotiabank analysts note that the bearish structure in USD/CAD remains intact, limiting rebound attempts. The absence of significant escalation in market tensions and stretched US Dollar valuations could cap any meaningful upside in the pair in the short term, as Canadian fundamentals gradually improve [1].
According to the latest data, the US Dollar was down 0.12% against the Canadian Dollar and lost ground against most major currencies, with the exception of the Swiss Franc, where it was the strongest [1].
CONCLUSION
The USD/CAD pair is under pressure due to a combination of a softer US Dollar, higher oil prices, and improving Canadian fundamentals. Market sentiment has improved on hopes for US-Iran diplomatic progress, while analysts expect the Bank of Canada to adjust its outlook for higher oil prices and the Federal Reserve to maintain a cautious stance. The overall market takeaway is a medium-impact shift favoring the Canadian Dollar in the near term.