The Canadian dollar strengthened further in early Asian trading on Tuesday, keeping USD/CAD near 1.3790 for a second straight session, as the US dollar softened on receding risk aversion and signs of progress in US–Iran diplomacy.
Hopes for longer ceasefire pressure the greenback
Reports that Washington and Tehran may pursue additional talks to secure a longer-term ceasefire before the current two-week truce expires prompted a shift out of the US dollar.
President Trump said Iran had reached out to reopen diplomatic channels, while Iranian President Pezeshkian signaled readiness for “lawful dialogue.” Vice President Vance called weekend discussions “constructive,” reinforcing expectations that tensions could ease.
A possible reopening of the Strait of Hormuz added to the pressure on the US currency, as prospects of smoother oil flows undermined crude prices and reduced safe-haven demand for the greenback.
Fed tightening expectations pared after softer inflation
The changing geopolitical backdrop fed into monetary policy expectations. Traders dialed back forecasts for more aggressive Federal Reserve tightening amid speculation that a sustained ceasefire could limit future inflation shocks from energy markets.
That view was supported by fresh US data. March’s Consumer Price Index rose 2.9% year-on-year, just below the 3.0% consensus. The print points to gradually easing price pressures, a key input into Fed decision-making.
Federal Reserve Governor Miran said the recent energy shock tied to the Middle East conflict has not yet altered long-run inflation expectations and suggested price growth could align with the Fed’s target within a year.
Oil slide caps upside for the Canadian dollar
While broad US dollar weakness is supporting the Canadian dollar, downside in USD/CAD appears limited by the pullback in oil prices, which typically erodes support for the commodity-linked loonie.
Crude fell as supply fears faded on signs of continued US–Iran engagement. West Texas Intermediate futures for May delivery dropped 2.8% on Monday to settle at $83.50 per barrel after Omani officials confirmed they would host preliminary talks between the parties next week.
For Canada, softer crude prices translate into weaker energy revenues, partly offsetting the currency gains that would normally arise from a declining US dollar. The result is a murkier outlook for USD/CAD, with the pair likely to consolidate as opposing forces balance each other.
Domestic politics: Carney wins majority, BoC gains flexibility
On the domestic front, Prime Minister Carney secured a clear parliamentary majority for his Liberal government on Monday, capturing 172 seats in Canada’s 343-seat House of Commons. The outcome gives Ottawa stronger control over its legislative agenda as it navigates shifting geopolitical and economic conditions.
Monetary policy in Canada also appears to have more room to maneuver. The Bank of Canada’s Business Outlook Survey, released last week, showed firms’ inflation expectations for the next two years easing to 2.2%. That moderation offers the central bank additional flexibility on the timing and pace of any policy adjustments.
Risk appetite improves as volatility falls
Broader market sentiment has turned more positive. Capital is rotating out of the relative safety of US Treasuries and into growth-sensitive assets. The CBOE Volatility Index (VIX), widely viewed as a barometer of market fear, has dropped more than 15% in the past 48 hours to 13.5, its lowest level in three months.
The combination of lower volatility, easing inflation and receding geopolitical stress is undermining demand for the US dollar, though commodity-related headwinds are complicating the picture for currencies like the Canadian dollar.
Outlook: focus on US disinflation and commodity headwinds
In the weeks ahead, traders will watch whether the US disinflation trend is strong enough to extend the dollar’s decline against major peers, particularly those tied closely to commodities.
For USD/CAD, the tug-of-war between a softer greenback and weaker oil prices points to a period of range-bound trading unless a clear catalyst emerges either from central bank policy signals, a decisive shift in the US inflation path, or a renewed flare-up—or lasting resolution—in the Middle East.
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