Canadian Dollar Forecast: USD/CAD Rally Stalls at Key Level as Hormuz Risks Ease

• Crude prices tumble as hopes for a US-Iran ceasefire deal improve
• Markets now pricing Fed hikes rather than cuts by year-end
• USD/CAD caught between 1.3800 support and the 200DMA
• Fed repricing and risk sentiment loom as the key drivers for direction

Hormuz Hopes Crush Crude

An end to the Iran war appears to be getting closer, helping spark a sharp reversal in crude prices as markets grew more optimistic about the eventual reopening of the Strait of Hormuz. Iranian officials were in Doha on Monday for talks with Qatar’s prime minister as negotiations continued over a potential framework agreement with the US.

Reports suggest discussions have centred on reopening the strait, Iran’s uranium stockpiles and the possible release of frozen Iranian funds. While Washington and Tehran continue to caution that a final deal is not imminent, both sides have acknowledged progress is being made towards an agreement that could pave the way for a broader peace deal. That's been enough to buoy sentiment. 

The move lower in crude weighed on USD/CAD, primarily through the risk sentiment channel given the pair has shown little relationship to wild swings in crude since the war began, perhaps reflecting the major net energy exporter status both the US and Canada share.

With many major markets closed for holidays on Monday, including in the US and UK, the true reaction to the news flow may not yet be fully reflective of the developments seen over the weekend and into Monday.

Fed Pricing Looms Larger Than Oil

Beyond developments surrounding ceasefire negotiations and the Strait of Hormuz, the event calendar looks relatively quiet until later in the week. In Canada, the only release of real significance comes on Friday with GDP figures, although whether it can rival the influence of broader risk sentiment and Fed pricing remains questionable given the latter has been the dominant driver for USD/CAD direction recently.

The focus on the US side will remain on Fed speak and whether policymakers validate the hawkish repricing seen recently in front-end rates. Fed Governor Christopher Waller helped reinforce that shift late last week, saying it was “crazy” to even discuss near-term rate cuts with inflation still running above target.

Source: TradingView

While the hawkish repricing of the Fed outlook unwound a touch on Monday with markets now pricing 13.5 basis points of tightening by year-end, the broader shift in thinking remains notable. Markets are now debating hikes rather than cuts, and with US economic data continuing to impress relative to that north of the border, it looms as the key fundamental factor likely to influence USD/CAD beyond the day-to-day swings driven by Hormuz headlines.

USD/CAD Trapped Between Key Levels

USD/CAD sits at an interesting juncture on the charts, sandwiched between the 200-day moving average on the topside and 1.3800 support on the downside. The close proximity to these levels provides a rich hunting ground for traders, creating a variety of setups to consider depending on how the near-term price action evolves.

Source: TradingView

While the pair has enjoyed a strong bull trend since the start of May, mirroring the bullish message from the oscillators, it does not preclude short setups from the menu given the shift in sentiment towards the war.

If the price can ease below 1.3800 support and hold there, shorts could be set beneath the level with a tight stop above, targeting the confluence of the 50% retracement of the April bear move and 50-day moving average at 1.3758. If that were to break, 1.3710 is the next downside level of note, coinciding with the 38.2% Fibonacci retracement of the April bear move.

Should the bull trend reassert itself with a sustained push back above the 200-day moving average, longs could be set with a tight stop beneath, with 1.3860 or the 78.6% Fibonacci retracement of the April move at 1.3877 two topside targets to consider.