USD/CAD Market Update

USD/CAD Market Update – Friday, March 20, 2026

Current Level: Mid-1.37s (24hr range 1.3700–1.3743)

USD/CAD is trading near 1.3729 on Friday morning, gaining 9 pips from the previous session as the pair consolidates in the mid-1.37 range. The move comes as markets digest weaker-than-expected Canadian retail sales data for January, which showed 1.1% growth versus expectations of 1.5%, though the market reaction was muted as geopolitical developments in the Middle East continue to dominate investor sentiment. The U.S. dollar maintains a firm tone across the G10 basket as safe-haven flows persist amid ongoing conflict between the U.S. and Iran, while the Canadian dollar faces pressure despite elevated oil prices that continue to reflect supply concerns from the disruption.

Market Overview:

Risk appetite remains cautious this morning as traders assess the ongoing U.S.-Iran conflict and its impact on global energy markets. Equity markets are trading mixed, with investors weighing persistent geopolitical risks against hopes for eventual de-escalation. The U.S. dollar shows modest strength as safe-haven demand continues, supported by reports that the Trump administration is considering plans to occupy or blockade Iran's Kharg Island, which accounts for 90% of Iran's total oil exports. Global bond yields remain elevated as markets reassess inflation trajectories following the recent surge in energy prices. Gold has rallied to $4,700 as investors seek alternative safe-haven assets, while oil prices hold near current levels as the conflict continues to disrupt supply flows through the Strait of Hormuz.

Canadian Retail Sales Miss Expectations:

Canadian retail sales posted 1.1% growth for January, falling short of the 1.5% market consensus. The primary driver of this month's growth was the automotive sector, with new car and other motor vehicle dealers seeing significant gains, even as sales at gas stations experienced a slight dip. When excluding autos, retail sales still grew by 0.8%, though this figure also missed the forecasted 1.2% expectation. Beyond the auto sector, core retail sales showed resilience, rising by 0.9% thanks to stronger performance from general merchandise and sporting goods retailers. Geographically, the retail boost was widespread, with all provinces reporting increases across the board, led most notably by a strong 3.5% surge in Alberta. E-commerce also continued its steady growth to account for 6.2% of total retail trade, and early advance indicators suggest this positive spending momentum likely carried over into February.

The market showed minimal reaction to the data release, as the U.S.-Iran conflict continues to dominate current sentiment. The weaker-than-expected retail sales data does not materially change the near-term policy outlook for the Bank of Canada, which is expected to hold its overnight rate at 2.25% at the upcoming April 29 meeting. The combination of cooling consumer spending and labor market softness suggests the Bank will maintain its current stance while monitoring the energy price shock from the Iran conflict and its potential impact on inflation.

U.S.-Iran Conflict Escalates with Kharg Island Threat:

Overnight markets remained within recent ranges as the U.S.-Iran conflict continues to dampen risk sentiment. Concerns over inflation and economic growth risks continue to weigh on investor sentiment, subduing risk appetite and keeping the U.S. dollar strong. The dollar received an additional boost after overnight reports suggested the Trump administration is considering plans to occupy or blockade Iran's Kharg Island to pressure Iran into reopening the Strait of Hormuz. The island accounts for 90% of Iran's total oil exports, making it a critical chokepoint for global energy supply.

Canada and its allies are ready to help safeguard the Strait of Hormuz. In a joint statement co-signed by the United Kingdom, France, Germany, Italy, the Netherlands, and Japan, the nations also called for an immediate comprehensive moratorium on attacks on civilian infrastructure, including oil and gas installations. Defence Minister David McGuinty said Canada is considering aiding Iran's neighbors if they seek assistance from the NATO alliance. The statement follows U.S. President Donald Trump's request to allies to help secure the vital oil and gas waterway, which was rejected.

Technical Breakout Significance:

Wednesday's close above 1.3728 ended the November downtrend and resolved consolidation higher, shifting focus to 1.3856 then 1.3932. However, immediate upside momentum is required to validate the breakout, as the response has been muted so far. The level 1.3728 now acts as initial support, followed by 1.3682, with trendline support at 1.3656 serving as the uptrend pivot. A close below this level would turn the outlook neutral. The one to three month target has been raised to 1.3900 following the breakout, though follow-through is needed to confirm this move.

RBC Currency Report Card Updates Forecasts:

RBC Capital Markets released its March Currency Report Card with updated forecasts reflecting the impact of the Iran conflict. Since the start of the conflict, broad-based USD strength has dominated FX due to investor flows rotating into dollar-denominated assets and the U.S. economy being better insulated than many of its peers as a net energy exporter. RBC views the recent dollar strength as contingent on the duration and intensity of the Iran conflict. For outperformers, RBC highlights AUD and CAD. Both are supported by terms of trade and commodity exporters. CAD additionally benefits from its strong correlation with the U.S.

Key forecast revisions include: AUD/USD profile revised higher with end-2026 now 0.73 (prior 0.70) and peak at 0.74 in Q2-2027. NZD/USD sees downward revisions with end-2026 now 0.61 (prior 0.62) and end-2027 0.61 (0.63). EUR/CHF long-run profile revised lower with end-2026 0.93 (prior 0.94) and end-2027 0.92 (0.93). EUR/GBP sees downward revisions with end-2026 0.86 (prior 0.88) and end-2027 unchanged at 0.89.

Dollar Index Consolidates Above 100 Mark:

The dollar index was propelled back above the 100 mark after Wednesday's Fed policy meeting before edging back below it as the U.S. and Israel sought to reassure investors rattled by the latest escalation targeting major Persian Gulf energy facilities. Both parties hinted they would refrain from further strikes on Iranian energy infrastructure. However, such remarks are insufficient to deter oil prices from rising further, especially given that the greater leverage over the energy market lies with Iran, which has shown no commitment to scaling back disruptions to energy facilities.

The U.S. dollar continues to consolidate its support, with mutually reinforcing surging oil prices and a hawkish Fed adding bullish impetus to the currency. The Fed Chair made it clear that the Fed will not cut rates again until inflation resumes cooling, while stressing that, although surging oil prices may prove inflationary, it is still too soon to gauge their impact on the U.S. economy. Markets reacted sharply, almost fully pricing out the single remaining cut expected by year end, already reduced from two before the conflict began. Markets recognized that the Fed's expectations for softer inflation in the coming months would likely have been unmet even without the conflict. That gave investors greater confidence to lean more decisively toward the hawkish side, allowing fundamentals to take the lead in driving FX moves beyond what geopolitically driven considerations alone would have justified.

Bank of Canada Holds at 2.25% with Cautious Tone:

The Bank of Canada kept its overnight rate at 2.25% this week, where it has sat since October, signaling caution as growth cools and slack persists. The tone around domestic demand has clearly softened relative to January, with the Bank characterizing growth as weaker than it had previously expected. That shift reflects a run of slower data: momentum that faded sharply after Q3, a labor market that has lost earlier traction, and signs that excess supply is persisting rather than narrowing. With demand softening, financial conditions tightening, and the economy operating below capacity, a sustained rise in energy prices is more likely to be interpreted through the lens of pressure on consumers and potential demand destruction than through the income boost from Canada's commodity exposure.

Against this backdrop, USD/CAD has moved up this week from 1.3650 to 1.3720 on erratic trading, and is likely to maintain the trading range of 1.35 to 1.37 seen over the last two months. The level 1.38 is a short-term ceiling if worsening domestic outlook prevails over terms of trade. The Bank's cautious stance reflects the two-sided nature of the oil shock for Canada: higher crude supports national income and royalties, yet it also squeezes households through fuel and food, so the net macro impact depends on duration and pass-through.

Euro Jumps as ECB Recalibrates:

The euro staged its strongest rally since January yesterday, rising more than 1% against the U.S. dollar and unwinding last week's losses. The move was driven by a sharp pullback in oil prices and a hawkish shift in ECB communication, which together eased some of the immediate pressure on EUR/USD. However, the recovery sits on fragile foundations, and the broader narrative remains dominated by the energy shock. The ECB left policy rates unchanged, keeping the deposit rate at 2.00%, as widely expected. What mattered was the tone. President Lagarde delivered a measured assessment of the inflation risks stemming from higher energy prices, signaling that the Governing Council is not rushing toward a rate hike. Yet the reappearance of the phrase "monitor closely" was a clear signal that the ECB has moved to a higher state of alert.

The Council now sees inflation risks skewed to the upside, and the bar for a policy response has fallen meaningfully. With the Middle East conflict dragging on and energy flows increasingly disrupted, the ECB's baseline assumption of a temporary shock looks increasingly optimistic. Policymakers acknowledge that energy prices are likely to remain higher for longer, and several Council members have indicated they would be prepared to raise rates as early as the April meeting if inflation drifts too far above target or if second-round effects begin to emerge. Markets have taken the hint: traders are now pricing roughly 16 basis points of tightening for April and more than two quarter-point hikes by year end. For the euro, this repricing matters. The currency's rebound reflects a view that the ECB may need to tighten sooner than previously assumed, improving the relative appeal of euro-denominated assets. However, the underlying macro backdrop remains challenging. Europe is far more exposed to the terms-of-trade shock than the U.S., and EUR/USD continues to trade as a function of energy volatility rather than domestic fundamentals.

Bank of England Holds with Unanimous Vote:

The Bank of England voted unanimously to keep interest rates on hold at 3.75% yesterday, marking the first decision without any dissent in four and a half years. The entrenched hawkish stance underscores the high level of sensitivity the Bank holds toward the inflation outlook. Markets reacted sharply, with gilts and sterling edging higher, while bets for hikes in 2026 climbed to almost 75 basis points by year end. The Bank expected a sharp drop in inflation pre-conflict, expected to reach 2% by April, mostly tied to 2024 budget tax increase base effect adjustments, as well as policy changes aimed at reducing energy bills at the 2025 budget. The sharp hawkish defensive raised today is justified at a moment when an external shock of great magnitude muddles the expected outlook.

The UK faces greater vulnerability than peer markets to energy price shocks. Brent crude is the primary benchmark for oil pricing in the Atlantic Basin and is closely linked to North Sea production. Since the UK sits at the center of this pricing ecosystem, wholesale fuel prices track Brent very closely. Also, the UK has a largely more liberalized market than say the eurozone, where a greater share of fixed tax layer helps contain sharp price spikes. Switzerland has a much stronger franc and a more diversified energy mix to fend off energy spikes, while the U.S. has its own extensive production capacity, buffers the UK appears to lack. Sterling strengthened across the board, but the sharp hawkish repricing that pre-dated the policy meeting meant much of the fuel had already been exhausted. The meeting nonetheless validated markets' highly speculative hawkish bias, providing some support for the pound.

Canadian Data/Outlook:

Canadian retail sales posted 1.1% growth for January, falling short of the 1.5% market consensus. When excluding autos, retail sales grew by 0.8%, also missing the forecasted 1.2% expectation. The Bank of Canada is expected to hold its overnight rate at 2.25% at the upcoming April 29 meeting. RBC forecasts the BoC overnight rate to remain at 2.25% through all of 2026. The central bank is comfortable at the bottom of the neutral range. However, policymakers must weigh rising energy costs against domestic economic struggles. The combination of cooling consumer spending and labor market softness suggests the Bank will maintain its current stance while monitoring the energy price shock from the Iran conflict. With USMCA negotiations approaching, the Canadian dollar remains vulnerable to weakness should tensions with the United States escalate, though elevated oil prices have provided offsetting support in recent sessions.

Fed Watch:

The Federal Reserve held rates at 3.50% to 3.75% this week, as expected. The Fed Chair made it clear that the Fed will not cut rates again until inflation resumes cooling, while stressing that, although surging oil prices may prove inflationary, it is still too soon to gauge their impact on the U.S. economy. Markets reacted sharply, almost fully pricing out the single remaining cut expected by year end, already reduced from two before the conflict began. The market is now pricing in only minimal probability of a rate cut by the Fed this year. RBC expects the Fed Funds range will remain at the current 3.50% to 3.75% range through 2026. The oil price shock from the Iran conflict adds a dimension to the Fed's inflation challenge that may force the central bank to remain restrictive even as growth weakens. In the near term, the greenback is expected to continue gathering support on both geopolitical and fundamental grounds. However, the firm hawkish lean may have been overdone: the U.S. continues to grapple with a soft labor market, while activity and consumption are likely to dampen as inflationary pressures from the conflict build. The outcome may be a temporary high-inflation phase met by a softening macro backdrop, ultimately warranting cuts later in the year, a combination that would add renewed pressure on the greenback, especially now that any dovish bet has been depleted.

Technical Picture:

Resistance: 1.3728 (potential triple top, has capped rallies on three occasions), 1.3856 (initial upside target), 1.3932 (early January double top)
Support: 1.3700 (24hr low), 1.3682 (secondary support), 1.3656 (trendline support serving as uptrend pivot), 1.3550 (1 to 3 month target)
Outlook: Wednesday's close above 1.3728 ended the November downtrend and resolved consolidation higher, shifting focus to 1.3856 then 1.3932. However, immediate upside momentum is required to validate the breakout, as the response has been muted so far. The level 1.3728 now acts as initial support, followed by 1.3682, with trendline support at 1.3656 serving as the uptrend pivot. A close below this level would turn the outlook neutral. The one to three month target has been raised to 1.3900 following the breakout.

Week Ahead:

RSI Scale: <30 Oversold | 30-40 Risk-Off | 40-60 Neutral | 60-70 Risk-On | >70 Overbought

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions. Vantry Capital Inc.