- USD/CAD edges higher during the Asian session on Tuesday, though the upside seems limited.
- The uncertainty over US-Iran peace talks revives USD demand and lends support to spot prices.
- Elevated Oil prices underpin the Loonie and cap the pair ahead of the BoC/Fed rate decisions.
The USD/CAD pair reverses a modest Asian session dip on Tuesday and looks to build on the previous day’s modest rebound from sub-1.3600 levels, or the lowest since March 12. Spot prices currently trade around the 1.3630 region, though the upside potential seems limited amid a combination of diverging forces.
Mixed signals over US-Iran peace talks assist the US Dollar (USD) to attract some safe-haven flows and turn out to be a key factor acting as a tailwind for the USD/CAD pair. In fact, Iran reportedly gave the US a new proposal on reopening the Strait of Hormuz and ending the war, with nuclear negotiations postponed for a later stage. However, the Wall Street Journal reported that US President Donald Trump was skeptical about Iran not dealing in good faith or being open to meeting his key demand of ending nuclear enrichment.
Meanwhile, continued disruptions to shipping through the critical Strait of Hormuz remain supportive of elevated Crude Oil prices, which underpins the commodity-linked Loonie and keeps a lid on the USD/CAD pair. Traders also seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of this week’s key central bank event risks. The Bank of Canada (BoC) is scheduled to announce its policy decision on Wednesday, and will be followed by the outcome of the highly anticipated two-day FOMC meeting.
Investors will look for fresh cues about the future policy outlook amid expectations that the war-driven surge in energy prices will rekindle inflationary pressures. This, in turn, will play a key role in determining the next leg of a directional move for the USD/CAD pair. The mixed fundamental backdrop, in turn, makes it prudent to wait for strong follow-through buying before confirming that the pair’s recent fall, witnessed since the beginning of this month, has run its course and positioning for any meaningful recovery in the near term.
