USD/CAD Market Update

USD/CAD Tumbles to 1.3675 – Monday, March 23, 2026

Current Level: Mid-1.36s (24hr range 1.3685–1.3755)

USD/CAD is trading near 1.3675 on Monday morning, declining 54 pips from the previous session as the pair retreats sharply from last week's highs. The move comes as President Trump announced a five-day postponement of planned airstrikes on Iranian energy infrastructure, citing productive conversations about ending the conflict, though Iranian officials deny any such negotiations are taking place. The U.S. dollar is showing broad weakness across the G10 basket as safe-haven demand eases temporarily, while the Canadian dollar gains support from its commodity exporter status despite oil prices plunging over 14% following Trump's announcement.

Market Overview:

Risk appetite surged this morning as equity markets rallied sharply following the U.S. announcement to postpone military strikes. The Dow Jones climbed nearly 900 points as investors welcomed the potential for de-escalation in the Middle East conflict. Global bond yields moved significantly lower as immediate fears of further energy supply disruptions eased. Oil prices plunged over 14% after Trump's announcement, though prices remain elevated from pre-conflict levels as the Strait of Hormuz remains largely closed. The U.S. dollar is slightly weaker versus the G10 basket as traders monitor the situation, with currency markets showing heightened sensitivity to any updates on potential ceasefire negotiations.

Trump Postpones Iran Strikes, Markets Rally on Relief:

President Trump caught markets off guard by reversing his own 48-hour ultimatum to Iran, postponing planned strikes against Iranian energy installations for five days. Trump claimed there were very good and productive conversations about ending the war, suggesting that de-escalation efforts may be gaining traction. However, Iran's Fars news agency quickly reported there has been no direct or indirect contact with the President, casting doubt on the sustainability of the relief rally. Financial markets initially reacted with a massive sense of relief, with oil prices slumping by as much as 14%, allowing S&P futures to flip a 0.9% loss into a 2.5% gain, while European markets experienced an even more dramatic swing.

These joyous reactions proved short-lived as traders realized the underlying tension remains unresolved. Despite the pause in military action, the structural damage to the global energy sector remains a grave concern that extends far beyond a temporary scare. Recent attacks on Qatar have knocked offline nearly a fifth of their liquefied natural gas export capacity, and energy officials believe this will sideline twelve million tons of gas annually for up to five years. Losing twenty billion dollars in yearly revenue transforms a brief supply hiccup into a long-term crisis for European and Asian markets. These extended disruptions are fueling serious inflation fears, forcing central banks to adopt stricter language to prevent a repeat of past mistakes with runaway prices.

Energy Crisis Extends Beyond Temporary Disruption:

The globe is experiencing its most severe energy supply crisis to date, according to Fatih Birol, executive director of the International Energy Agency. Iranian maritime threats in response to U.S. and Israeli strikes have disrupted critical shipping lanes, creating bottlenecks that extend far beyond oil and gas to include vital commodities such as fertilizers, petrochemicals, and sulfur. These supply chain interruptions are impacting essential materials for manufacturing, textiles, and farming. In response, IEA member countries have authorized the deployment of 400 million barrels from strategic oil reserves, equivalent to one-fifth of their total stockpiles.

The energy shock has essentially erased any hope for interest rate cuts this year. Traders have already adjusted to this hawkish tone and have completely erased their previous hopes for any Federal Reserve interest rate cuts in 2026. The financial landscape is growing increasingly tense as strict monetary policies clash with slowing economic growth and the unresolved threat to shipping lanes like the Strait of Hormuz. Investors are steadily stepping back from risky assets because they worry central banks might push economies too hard while energy prices stay stubbornly high. If these tight financial conditions and supply issues drag on much longer, the world faces a significantly higher risk of sliding into stagflation or a broader global recession.

Dollar Positioning Turns Positive for First Time This Year:

Traders turned positive on the U.S. dollar for the first time this year as war in the Middle East jolts energy costs higher and supports the currency's status as a safe haven. The CFTC's figures offer investors a glimpse into market sentiment, showing how hedge funds and asset managers are positioned in the currency derivatives market. The currency stands out as the preferred defensive play across asset classes when both bonds and equities come under pressure. The energy shock has essentially erased any hope for interest rate cuts this year, with markets now pricing in zero probability of a Federal Reserve rate cut in 2026.

The USD and oil prices are pulling USD/CAD in opposite directions. Analysis from RBC's FX Strategist Daria Parkhomenko shows that USD/CAD tends to have a larger sensitivity to a 1% move in the USD than to the same magnitude move in WTI crude oil prices. This supports the view that the USD is the main driver of USD/CAD, with crude oil prices acting as a partial offset. Indeed, the USD is selling off this morning on optimism of de-escalation in the Iran conflict and dragging USD/CAD lower with it despite lower crude oil prices.

Canadian Dollar Benefits from Commodity Exporter Status:

The Bank of Canada recently shifted its tone regarding domestic demand, acknowledging that growth is appearing weaker than expected. This change follows a stretch of disappointing data, including a labor market that is losing its earlier traction and persistent excess supply. By moving away from its previous stance on policy appropriateness, the Bank is clearly trying to stay flexible. Market sentiment has soured quickly, with leveraged funds pulling the Loonie's net positioning back toward negative territory. Even though the Bank is focused on domestic cooling, the market seems more concerned about the risks of demand destruction.

Meanwhile, global markets are largely ignoring Governor Macklem's more patient messaging. Most investors are instead focusing on hawkish signals from other central banks and rising geopolitical tensions. This has sparked a broad selloff that is pushing Canadian bond yields higher, despite the Bank's more cautious domestic outlook. Governor Macklem may have pushed against this market pricing, as the Bank's stance remains significantly less hawkish than the prevailing global trend. The Canadian dollar continues to benefit from its status as a commodity exporter, with oil prices remaining elevated despite today's sharp decline.

ECB Hawks Reclaim the Narrative:

The euro began the week showing more selective bearishness, particularly against oil exporters such as the USD and CAD, as markets continued to digest last week's hawkish signals from the ECB. With the Bank having effectively concluded its easing cycle, any tightening responsiveness is now perceived as more imminent compared with the Fed or the BoE, both of which had been in easing mode and therefore had no hikes on their near-term radar. The result is more ready-made support for the euro, best evidenced against currencies that are not materially supported by surging oil prices.

A raft of ECB policymakers has reinforced Lagarde's hawkish messaging. Germany's Joachim Nagel and Gabriel Makhlouf suggested the Bank may need to consider hiking as soon as the April 30 meeting if price pressures build further. ECB Vice President Luis de Guindos said the ECB is ready to respond as necessary, noting that the conflict poses risks to both the inflation and growth outlook. More ECB speakers are lined up this week, starting with Philip Lane and Piero Cipollone today, likely to reinforce the hawkish contour that should support the euro in the short term.

Sterling's Fragile Backstop Exposed:

Sterling came under pressure on Friday as UK government borrowing costs rose to their highest level since 2008, with the 10-year yield briefly touching the 5% mark. The selloff unveils the fragile nature of sterling's only lifeline of support: a more hawkish BoE since the conflict began. Last week, amid a parade of central bank policy meetings, the BoE stood out as the most hawkish of the bunch, leading a global bond selloff as policymakers delivered firmer signals in response to the conflict driven repricing of inflation expectations. Markets now price in more than three quarter-point hikes by year end.

The move looks exaggerated. With a softening labour market and sluggish economic momentum, both likely to deteriorate further because of the conflict, the BoE is hardly in a position to abandon its easing bias. That raises doubts about how realistic the current market read is. The conflict also puts the spotlight back on the government's self imposed fiscal rules. Friday's surge in the 10-year yield highlighted the pressure that the conflict is placing on the government's interest rate repayment burden. Weak political leadership, combined with a fiscal risk premium that has been dormant since the 2025 Budget but may now be reawakening, is likely to exert meaningful bearish pressure on sterling in the months ahead as local elections approach in May.

Canadian Data/Outlook:

There is no top-tier data for the week ahead domestically. January's SEPH payrolls on Thursday is expected to show further stabilization in job vacancies following improvements in Indeed job data. Advance indicators for manufacturing on Tuesday and wholesale on Friday in February are expected to show a partial rebound after auto industry disruptions drove declines in the prior month. 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, though policymakers must weigh rising energy costs against domestic economic struggles. With USMCA negotiations approaching, the Canadian dollar remains vulnerable to weakness should tensions with the United States escalate.

Fed Watch:

The Federal Reserve is expected to hold rates at 3.75% at its next policy meeting on April 29. Markets have completely priced out any rate cuts for 2026 as the energy 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. Recent market repricing shows traders have erased all expectations for Federal Reserve interest rate cuts this year. RBC expects the Fed Funds rate will remain at the current 3.50% to 3.75% range through 2026. 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.

Technical Picture:

Resistance: 1.3728 (now acts as initial support after Wednesday's breakout, followed by 1.3682 as secondary support), 1.3856 (initial upside target), 1.3932 (early January double top)
Support: 1.3685 (24hr low), 1.3656 (trendline support serving as uptrend pivot, a close below turns outlook neutral), 1.3598 (corrective rally low), 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 and today's decline brings the pair back below this key level. 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 1.3656 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.

Week Ahead:

Market Mood:

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.