USD/CAD Market Update

Current Level: High-1.39s, pressing 1.4000 (24hr range 1.3990 to 1.4019)

USD/CAD traded in the high-1.39s on Tuesday, near 1.3996, holding just under 1.4000 after touching 1.4019 overnight. The relief rally that followed the weekend US-Iran de-escalation has lost momentum as traders turn to a heavy run of central bank meetings, led by Wednesday's Federal Reserve decision. The Canadian dollar remains the weakest major, lagging its G10 peers for a fourth straight session as oil extends its decline and the wide gap between Federal Reserve and Bank of Canada policy keeps the pair anchored near its 2026 highs.

Market Overview:

The dollar is broadly flat and Treasury yields are edging lower across the curve as the geopolitical risk premium fades and attention returns to fundamentals. With positioning already lightened over recent weeks, there has been no large unwind in directional trades, and the reaction to the ceasefire has stayed muted, with most major pairs moving less than a third of a percent. Relative growth, inflation and policy expectations are again differentiating currencies, and for now those fundamentals still favour the US dollar through a wide front-end rate advantage. Implied volatility remains contained ahead of the Fed.

US-Iran Relief Rally Steadies as Oil Extends Its Slide:

Washington and Tehran are preparing to sign an interim memorandum of understanding in Switzerland on Friday, and risk sentiment has steadied rather than extended as investors wait to dissect the detail. Oil continued to fall, with West Texas Intermediate down roughly 2.9% near 78 dollars, extending Monday's near 5% decline and leaving the major benchmarks down close to 11% on the month, according to RBC. The reaction has been measured because the path back to prewar pricing is not clear. Traffic through the Strait of Hormuz remains near zero, the reopening is expected to be gradual, and clearing the tanker backlog and rebuilding inventories would take time even if the framework holds. Friday's formal signing could trigger another leg lower in oil, a further headwind for the Canadian dollar given Canada's role as an energy exporter.

Canadian Data/Outlook:

The Canadian dollar has underperformed every G10 peer over the past three months and extended that run on Tuesday for a fourth consecutive session. Falling oil prices, a wide front-end rate gap and persistent trade-policy uncertainty around steel, aluminum and auto tariffs continue to weigh on the currency even against a softer dollar backdrop, according to RBC. Domestic data have actually firmed. Statistics Canada reported manufacturing sales rose 4.2% in April to 77.1 billion dollars, led by a record in petroleum and coal products, while wholesale sales rose 0.6% to 89.3 billion dollars, evidence that activity steadied in the second quarter after back-to-back contractions. The improvement has not been enough to offset the rate differential. Canadian government bond yields fell on the de-escalation as easier energy eases the inflation outlook, but the US yield premium over Canada remains north of 130 basis points and continues to do most of the work in USD/CAD. The Bank of Canada held its overnight rate at 2.25% on June 10, a fifth consecutive hold, and the next decision on July 15 falls outside the current window.

Fed Watch:

Wednesday's Federal Reserve decision is the week's marquee event for USD/CAD and the first meeting chaired by Kevin Warsh. The rate outcome is close to settled. The CME FedWatch tool implies a 98% probability that the committee holds the policy rate in the 3.50% to 3.75% range, and pricing for a cut this year remains minimal. With the decision near certain, the focus shifts to the updated Summary of Economic Projections and the new chair's first press conference. Markets will read the dot plot for whether officials still see the next move as more likely a hike than a cut, and with one Trump appointee now off the committee the projections could skew more hawkish than in March. A soft New York Fed Business Activity Index, which printed at negative 10.1 for June, is one reading that could temper a hawkish impulse, according to RBC. A hawkish hold would reinforce the current upward trajectory in the pair, while a dovish lean from the new chair could offer the Canadian dollar some relief.

Technical Picture:

Resistance: 1.4024 marks the June 11 high and the 2026 peak, with RBC citing initial resistance at 1.4050; a sustained break would open the November double top near 1.4151.
Support: 1.3980 is RBC's first support, with 1.3932 below it, the level that capped every USD/CAD rally this year before the breakout, and 1.3906 beyond; a close under trendline support near 1.3849 would be needed to end the current uptrend.
Outlook: The pair continues to hold the high-1.39s just under 1.4000, with the wide rate differential underpinning the topside bias. RBC has shifted its technical stance from bearish to neutral and flags scope for a pullback toward 1.3932 and 1.3906 over the next two to four weeks, with a one to three month target near 1.3900. A durable de-escalation that keeps oil lower is the main risk to the topside, while any breakdown in the Iran framework would likely return a safe-haven bid to the US dollar.

Week Ahead:

The Federal Reserve on Wednesday dominates the week for USD/CAD, with the rate decision near certain and the reaction hinging on the projections and the new chair's first press conference. The Bank of England and Swiss National Bank follow Thursday, both expected to hold. The domestic calendar finally offers a catalyst with Canada CPI on June 22, the first in-window domestic print after weeks of no releases, and US Core PCE on June 25 closes the window.

Other Notes:

• The Bank of Japan raised its policy rate to 1%, the highest since 1995, in a 7 to 1 vote, citing inflation risks from higher oil prices. The yen was little changed near 160 as the move was well telegraphed, keeping the threat of intervention on the table (Bank of Japan, CNBC).
• The Reserve Bank of Australia held its cash rate at 4.35% after three earlier increases, warning that inflation remains too high while flagging a softening growth backdrop.
• Canadian manufacturing sales rose 4.2% in April to 77.1 billion dollars and wholesale sales rose 0.6% to 89.3 billion dollars, pointing to firmer second-quarter activity even as the currency lags (Statistics Canada).
• Friday's formal US-Iran signing in Switzerland could trigger another leg lower in oil, a further headwind for the Canadian dollar.