USD/CAD declines as Hormuz disruptions keep Oil elevated, US-Iran talks in focus

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USD/CAD trades with a negative bias on Thursday, extending losses for a fourth straight day as elevated Oil prices support the commodity-linked Canadian Dollar (CAD), even as the US Dollar (USD) strengthens against most of its peers.

USD/CAD falls for a fourth straight day as elevated Oil prices support CAD.
US Dollar Index rebounds modestly but remains near six-week lows.
Traders await clearer signals on US-Iran talks as diplomatic efforts continue.

At the time of writing, USD/CAD is trading around 1.3708, its lowest level since March 23. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading near 98.20, snapping an eight-day losing streak. However, it remains close to six-week lows reached earlier this week.

Although crude prices have eased from recent highs on hopes that the US and Iran could reach a deal to end the war and reopen the Strait of Hormuz, uncertainty remains elevated. Supply through the Strait continues to face significant disruption amid a dual blockade by US forces and Iran, limiting a deeper pullback in Oil prices.

Iran is also tightening its grip on the Strait of Hormuz, with state media reporting that any planned transit tolls would be processed via Iranian banks, underscoring efforts to assert control over one of the world’s most critical energy chokepoints.

As a result, West Texas Intermediate (WTI) Crude Oil is rebounding after a three-day decline, trading around $90.50 at the time of writing. The Canadian Dollar remains sensitive to Oil price movements, given Canada’s status as a major crude exporter.

Looking ahead, traders await clearer confirmation of a second round of US-Iran peace talks after US President Donald Trump indicated that negotiations could resume this week, following last weekend’s talks in Islamabad that failed to produce a breakthrough.

Higher energy costs keep inflation concerns in focus globally. While Canada’s inflation remains below the Bank of Canada’s 2% target, policymakers are likely to adopt a wait-and-see approach as energy-driven inflation risks tilt to the upside.

In contrast, US inflation remains above the Federal Reserve’s 2% target, with March CPI rising to 3.3% YoY from 2.4%, tempering expectations for Fed easing and reinforcing the view that interest rates will remain unchanged in the near term.

On the data front, Initial Jobless Claims fell to 207K, below forecasts of 215K, while Industrial Production dropped 0.5% MoM in March, missing expectations of a 0.1% rise and reversing the prior 0.7% increase.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.