USD/CAD Market Update

Current Level: High-1.39s, just below 1.4000 (24hr range 1.3971 to 1.3996)

USD/CAD settled in the high-1.39s on Friday, near 1.3976, after retreating from the 1.4000 level it broke above on Thursday for the first time in 2026. Reports that Washington and Tehran are closing in on an agreement to pause hostilities and reopen the Strait of Hormuz sent crude oil sharply lower and pulled the US dollar off its safe-haven highs. The Canadian dollar drew only limited benefit, as the gap between Federal Reserve and Bank of Canada policy continues to anchor the pair near its highest levels of the year.

Market Overview:

Risk assets rallied and government bonds firmed as traders priced out some of the tail risk that had built up around the Middle East conflict. The US dollar gave back its intraday gains, with the dollar index slipping back below the 100 level after an early push higher. Equities advanced and Treasury yields eased. Lower oil prices took pressure off the near-term inflation outlook, though Thursday's hot US producer-price report is a reminder that the energy shock has already worked into the pipeline. Across the major currencies, implied volatility stayed low, reflecting a reluctance to take large directional positions against an uncertain backdrop.

Iran De-escalation Sends Oil to Eight-Week Lows:

President Trump said on Thursday that he had cancelled scheduled strikes on Iran because the final points of an agreement had been approved, and signalled a deal could be signed within days, according to NPR, NBC News and the Washington Post. Iran's semi-official Mehr News Agency published a 14-point draft memorandum that, per Al Jazeera and NPR, includes a ceasefire, the staged lifting of oil sanctions, the release of frozen Iranian assets, and a commitment to reopen the Strait of Hormuz within 30 days. Iran's foreign ministry cautioned that no final agreement has been reached, and the US naval blockade remains in place until a deal is signed. Crude fell hard on the headlines, with West Texas Intermediate dropping more than 4% to below 84 dollars and Brent sliding below 86.50 dollars, both at roughly eight-week lows, according to CNBC. The Strait carries close to a fifth of global oil supply, so even a partial reopening would remove a significant inflation risk that central banks have been forced to confront.

Markets Fade the Pattern:

Currency markets met the de-escalation headlines with caution rather than conviction. The sequence of escalation followed by a walk-back has repeated often enough this year that markets have a shorthand for it, the so-called TACO trade, the assumption that the administration steps back from its most aggressive threats. That skepticism showed up in a muted currency reaction: the dollar surrendered its intraday safe-haven gains, but most major pairs held narrow ranges as desks declined to chase a deal that has been called imminent several times before without being signed. The analytical caveat is that a ceasefire, even a durable one, would not immediately undo the inflation already in the system, since the energy shock has fed into shipping, freight and supply-chain costs that reach consumers with a lag.

Canadian Data/Outlook:

The Canadian dollar remains caught between opposing forces. Lower oil prices weigh on a major export, while the easing of the global inflation shock is modestly supportive of risk sentiment. Neither has been enough to overcome the policy-rate gap. The Bank of Canada held its overnight rate at 2.25% on June 10, a fifth consecutive hold, and Governor Macklem described a two-sided risk profile in which the Bank could raise rates if higher energy costs broaden into persistent inflation, or ease if US trade measures weigh on growth. With the Federal Reserve holding at a materially higher level, the front-end rate differential continues to favour the US dollar and has kept USD/CAD pinned near year-to-date highs. There is no major domestic data before the scheduled July 1 review of the Canada-United States-Mexico trade agreement, leaving the pair to trade off external drivers.

Fed Watch:

US producer prices rose 1.1% in May and 6.5% from a year earlier, the fastest annual pace since November 2022 and well above the 0.7% monthly consensus, according to CNBC and the Bureau of Labor Statistics. Gasoline jumped 23.4% at the wholesale level and energy rose 10.7%, accounting for most of the increase. The detail offered some relief, as core producer prices, which exclude food, energy and trade services, came in at 4.9% and below expectations, suggesting the surge is concentrated in energy rather than broadening. Even so, markets see no near-term path to rate cuts. The CME FedWatch tool shows roughly a 97% probability that the Federal Reserve holds its policy rate at 3.75% at the June 17 meeting, and pricing for a cut later this year has all but disappeared. The focus shifts to whether the updated Summary of Economic Projections leans toward an eventual hike.

Technical Picture:

Resistance: 1.4025 marks Thursday's high and the 2026 peak; a sustained break opens the 1.4100 area aligned with prior-year highs.
Support: 1.3950 is the first level, followed by 1.3900; below that sits a cluster of moving averages near 1.3840.
Outlook: The break above 1.4000 has not been decisively held, and the pullback leaves the pair consolidating in the high-1.39s. The topside bias persists while the rate differential favours the US dollar, but a durable de-escalation that keeps energy prices lower could cap further gains.

Week Ahead:

The week is dominated by central banks. The Federal Reserve decision on Wednesday is the marquee event for USD/CAD, with attention on the projections and Chair Powell's tone rather than the rate itself. The Bank of Japan and Reserve Bank of Australia decide Monday, UK inflation lands Tuesday, and the Bank of England and Swiss National Bank follow Thursday. With the Bank of Canada having just held, there is no domestic catalyst, so the Canadian dollar will take its lead from the Fed and from the path of oil prices.

Other Notes:

• The European Central Bank raised its deposit rate by 25 basis points to 2.25% on Thursday, its first increase since 2023, citing the inflation risk from higher energy costs. Euro-area inflation reached 3.2% in May, and markets expect at least one further move this year (European Central Bank, CNBC).
• The UK economy contracted 0.1% in April, its first monthly decline since August 2025, led by softer services output. The weak data reinforces expectations that the Bank of England holds at 3.75% next week even as the ECB tightens (Office for National Statistics).
• The Japanese yen is holding near the lows that have previously drawn official intervention ahead of Monday's Bank of Japan decision, keeping intervention risk in focus.
• Brent and West Texas Intermediate are set for steep weekly losses as the conflict premium unwinds, a move that would ease the energy-driven inflation impulse if it holds.