USD: DXY slides, oil cools, risk-on takes over
The US DXY Index is down nearly 2% over the past week, falling sharply after the ceasefire was confirmed. The dollar’s brief rebound didn’t last. Instead, markets have rotated back into a classic de-escalation trade.
Even with the maritime blockade in the Persian Gulf still in place, the risk of sustained economic disruption appears to be pushing all sides toward diplomacy. US officials are now working to schedule fresh, in-person meetings with Iranian representatives, following the earlier breakdown in talks held in Pakistan.
That diplomatic momentum isn’t limited to the Gulf. In Washington today, senior officials are also facilitating high-stakes discussions between Israel and Lebanon. Markets are reacting with notable optimism. In Taiwan, the main equity index reached a record high, even though the country remains highly dependent on imported energy. In other words, investors are increasingly pricing in the possibility of a broader, more durable peace arrangement.
This shift in sentiment is doing two important things. First, it’s helping keep crude futures below $100 a barrel. Second, it’s pulling capital back into emerging markets and growth-heavy sectors like technology.
The same recovery is visible in the United States. The S&P 500 has now erased its war-related drawdown. It’s also hard to ignore the political incentives here: stabilizing oil prices and moving toward a resolution supports domestic priorities, especially as inflation sensitivity remains high.
Iran still has leverage, particularly through its ability to disrupt key shipping lanes. But for now, global risk appetite is firm. The VIX Index is around 18, its lowest level since the conflict began, which suggests investors are comfortable leaning into the “risk-on” narrative.
That said, WTI still holding above $90 is a reminder that de-escalation has room to run. Markets are forward-looking and clearly prefer the diplomacy path. From here, though, optimism needs confirmation. The clearest proof point would be consistent, visible normalization of oil shipments through the strait.
EUR: The euro’s quiet comeback
EUR/USD pared back early‑day losses tied to news that US–Iran talks failed over the weekend. Risk‑off sentiment has so far stopped short of deteriorating further as markets continue to lean toward the de-escalation bias.
The pair rose 0.6% yesterday, exploring the 1.17 area more confidently away from the 200‑day moving average near 1.1670. We see this long‑term gauge – and spot’s posture relative to it – as instructive: spot fell aggressively below it when the conflict began and has only recently managed to stabilise above it. We interpret this as euro buyers showing their strongest conviction in the currency’s trajectory since the conflict started, pointing to a tendency to keep a long‑term bullish bias intact for now.
On a path of gradual de‑escalation, the euro is set to encounter a more distinctly hawkish ECB, with markets pricing a ~36% chance of a hike as early as this month. While highly unlikely, this pricing tendency reflects a market perception that the ECB is far readier than the Fed to tighten further. EUR–USD 2‑year OIS differentials are now the narrowest since late 2024, and although further de‑escalation would unwind part of that move, the ECB’s “tough talk” is more likely to stick than the Fed’s.
This would give EUR/USD a more robust fundamental anchor, setting the stage for a swifter move higher as sentiment improves – with scope to challenge early‑2026 highs. But for now, should de-escalation momentum gain traction, we see late-February highs near 1.1830 as an appropriate target in sight.
CAD: A fundamental medium-term view on the Canadian Dollar
When anchoring the USD/CAD to US-Canada 10-year real yield differentials and factoring in WTI oil, the Canadian Dollar currently looks modestly undervalued. The raw math suggests the CAD should be modestly stronger (trading closer to 1.35) based on fundamentals alone. What is truly interesting, however, is not just the current price level, but why this gap persists. Our model shows that while the currency’s link to real rate differentials remains remarkably steady, its connection to oil prices has become much more complex.
Specifically, the classic rule of “oil goes up, CAD goes up” no longer applies in every situation. Recent weeks have been a stark reminder that not all oil rallies are created equal. When oil spikes due to geopolitical tension or supply risks rather than global growth, it often triggers inflation fears and a rush to the safe-haven US Dollar. Consequently, rising WTI and higher yields can actually push the USD/CAD higher in the near term, even if oil traditionally benefits the Canadian currency during calmer markets.
So, what explains the rest of the Canadian Dollar’s persistent discount? The answer lies heavily in policy uncertainty and a lingering tariff premium. With the CUSMA trade agreement review looming, market and business uncertainty around US-Canada trade relations remains elevated. Furthermore, the Bank of Canada has clearly stated that US trade restrictions have disrupted local economic activity, forcing a restructuring process that takes time. Ultimately, this trade uncertainty acts as a persistent headwind, keeping a risk premium on the CAD that interest rates and oil simply cannot explain away.
Despite these medium-term headwinds, this week we’re seeing some near-term relief for the Loonie. The USD/CAD pair dropped notably from 1.3878 down to 1.3740, as de-escalation hopes firmly take hold of the broader markets. In fact, since the recent ceasefire agreement was confirmed just a week ago, the Canadian Dollar has gained roughly 1% against the Greenback. It is a clear sign that when geopolitical fears cool off, the US Dollar is exposed to make it visible its “risk policy” premium, allowing the CAD to get closer to its medium-term fair value.
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Calendar: April 13-17
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
