Canadian Dollar Steady as Peace Hopes Weigh on USD, Oil

Key Moments

USD/CAD paused a four-day advance and traded near 1.3990 during Asian hours on Wednesday as the US Dollar came under pressure.
Growing expectations of a US-Iran peace agreement have reduced risk aversion, weighing on the Greenback while also pushing oil prices lower.
Falling crude prices are limiting Canadian Dollar upside, given Canada’s role as the largest crude exporter and the currency’s tight link to commodities.

USD/CAD Slips as Risk Sentiment Improves

USD/CAD stalled its recent rally on Wednesday, trading around 1.3990 in Asian dealings after a four-session winning streak. The pair eased as the US Dollar came under renewed pressure, reflecting a shift in market tone as risk aversion faded.

This move in sentiment has been driven largely by increased optimism over a potential breakthrough peace accord between the United States and Iran. As risk appetite improved, demand for the US Dollar softened, contributing to the pullback in USD/CAD.

US-Iran Peace Prospects Gain Momentum

Momentum toward a peace agreement has accelerated. US Vice President JD Vance stated on Tuesday that President Donald Trump may release a preliminary agreement to end the war ahead of schedule, following the president’s earlier comments that the framework had already been signed. Simultaneously, Iranian Foreign Minister Seyed Abbas Araghchi confirmed that a new round of negotiations aimed at reaching a final, comprehensive peace deal is set to begin in Switzerland.

Market participants are closely tracking these developments, given their implications for geopolitical risk, energy markets, and broader currency moves.

Fed Meeting in Focus as Markets Eye Policy Guidance

Attention is also firmly fixed on Wednesday’s Federal Reserve policy decision. The US central bank is widely expected to adopt a cautious wait-and-see stance, leaving its benchmark rate unchanged in the 3.50% to 3.75% band.

Investors will scrutinize the post-meeting press conference for signals on how newly appointed Fed Chair Kevin Warsh intends to steer monetary policy. Any guidance on the policy outlook could have significant implications for the US Dollar and USD/CAD.

Event	Key Detail
Fed policy rate	Expected to remain at 3.50% to 3.75%
USD/CAD action	Halted four-day rise, trading around 1.3990
Peace negotiations	New US-Iran talks to begin in Switzerland

Oil Price Decline Caps Canadian Dollar Strength

Despite the softer US Dollar, downside in USD/CAD may be limited as the Canadian Dollar faces its own headwinds from weaker crude prices. The CAD, a commodity-linked currency, is sensitive to moves in energy markets, and lower oil prices tend to be a drag.

Crude prices fell as expectations increased for a US-Iran peace deal that could materially lift global supply. The two countries are scheduled to sign an interim agreement in Switzerland this Friday, which would grant Tehran broad economic incentives and allow the immediate resumption of Iranian oil exports. Furthermore, international tankers are expected to resume safe transit through the strategic Strait of Hormuz once the pact officially takes effect.

Given Canada is the largest crude exporter, this anticipated boost to supply and resulting downward pressure on prices poses a risk for the Canadian Dollar, potentially tempering any further USD/CAD declines.

Key Drivers of the Canadian Dollar

The Canadian Dollar’s performance is shaped by a combination of domestic fundamentals, global risk sentiment, and commodity dynamics. The following factors are central to CAD valuation:

Factor	Impact on CAD
Bank of Canada interest rates	Higher relative rates tend to support CAD; lower rates tend to weigh on it.
Oil prices	Rising oil prices are typically CAD-positive; falling prices are CAD-negative.
Inflation trends	Higher inflation often leads to rate hikes, attracting capital inflows and supporting CAD.
Economic data	Strong GDP, PMIs, employment, and sentiment data tend to boost CAD.
Trade balance	A positive balance supports CAD, while a weaker balance can pressure it.
Risk sentiment	Risk-on environments are generally CAD-supportive; risk-off favors safe-haven flows away from CAD.
US economic conditions	As Canada’s largest trading partner, US economic health significantly influences CAD.

Role of the Bank of Canada and Policy Tools

The Bank of Canada plays a pivotal role in steering the Canadian Dollar by setting the policy interest rate that influences borrowing costs across the economy. Its primary objective is to keep inflation within a 1-3% band by raising or lowering rates as needed.

When the BoC lifts rates, it tends to support the CAD by attracting foreign capital seeking higher yields. Conversely, lower rates can be a headwind. The central bank can also deploy quantitative easing to loosen financial conditions – which is generally negative for CAD – or quantitative tightening, which is typically supportive.

Oil, Inflation, and Macro Data: Transmission Channels to FX

Oil remains a crucial transmission channel for the Canadian Dollar. As petroleum is Canada’s largest export, changes in oil prices quickly feed into CAD demand. Higher prices usually increase demand for CAD by improving export revenues and the trade balance, while lower prices have the opposite effect.

Inflation data also matters. In a world of open capital flows, higher inflation often leads markets to anticipate tighter policy, drawing in foreign investment and lifting the local currency. For Canada, stronger inflation can therefore translate into a firmer CAD if it prompts expectations of BoC rate hikes.

Broader macroeconomic indicators – including GDP, Manufacturing and Services PMIs, labor market data, and consumer sentiment – provide insight into economic health. Robust readings tend to support the currency by signaling growth and potentially tighter monetary policy. Weak data can undermine the CAD by dampening growth expectations and reducing the likelihood of higher rates.