USD/CAD has seen a rise after a relatively stable day prior, trading around 1.3690 during the Asian session on Tuesday. The US dollar is gaining strength partly due to rising geopolitical tensions, creating new upward momentum for this currency pair.
With reports of worsening diplomatic relations in the Middle East, investors globally are shifting towards safe-haven assets. This shift seems to be driven by the fear that large-scale military conflicts might reignite, which usually leads to a preference for quality assets and elevates the US dollar against currencies that are more sensitive to these changes.
According to a CNN report from Monday, US President Donald Trump has been increasingly unhappy with the progress in negotiations aimed at halting hostilities in the region. Some aides have suggested that the administration is taking the possibility of resuming military action more seriously than in recent weeks. This sentiment is echoed by Iranian Parliament Speaker Mohammad Berger Ghalibaf, who, as reported by Reuters, has stated that Iran’s military is ready to respond to any future attacks, further straining the fragile ceasefire in the area.
Even with the US dollar’s current strength, the Canadian dollar remains a critical player in the energy sector. As Canada exports the most oil to the US, its currency is closely linked to oil prices, which have surged following President Trump’s remarks regarding the instability of the ceasefire. This increase in oil prices could disrupt global supply chains and hinder exports from the Middle East, giving the commodity-linked Canadian dollar some support and limiting how much USD/CAD can rise overall.
Concerns regarding inflation in Canada are resurfacing due to rising energy prices. Recent data from March showed the negative effects of fluctuating energy costs, with annual inflation hitting 2.4%, the highest in a year. Higher oil prices generally benefit the Canadian dollar, but they can also complicate the Bank of Canada’s (BoC) decision-making. The central bank has recently maintained interest rates, indicating that energy-driven inflation might not become a significant concern. However, if disputes persist, it may need to reconsider its cautious position.
