- Rising crude oil prices and a weakening greenback pushed USD/CAD back below 1.4100, threatening a return to its July downward channel
- Central bank divergence remains a risk, as a cautious Bank of Canada (BoC) and hawkish Federal Reserve could limit further loonie gains
- The Bank of Canada’s steady policy rate keeps interest rate differentials tilted in favor of greenback dip-buyers on deeper pullbacks
The US dollar briefly halted the Canadian dollar’s recent climb earlier this week. But it started falling again yesterday and still looks weak today. Now trading below 1.4100, around 1.4080, investors wonder if USD/CAD will return to the steady decline it had between late June and mid-July.
What Broke the Downtrend
The brief pause in the downtrend had a clear cause. On Monday, the US administration announced new 50% tariffs on various Canadian goods, including wine, dairy, and cement. This action was stated as a response to what the US described as discriminatory practices against American products in Canada.
Canadian Prime Minister Mark Carney called this the latest in a series of unilateral US trade actions. He said Canada had “merely matched” prior US measures. Headlines like that usually hit the loonie first and hardest, which explains why the dollar strengthened Monday and Tuesday.
What Is Driving the Loonie’s Rebound?
A significant increase in global crude oil prices is the primary driver behind the Canadian dollar’s resurgence. As a major exporter of commodities, Canada benefits directly from rising crude prices. Oil prices have reached new multi-week highs, which has helped to offset recent domestic challenges and provide strong fundamental support for the Canadian dollar.
Potential Risks Beneath the Surface
Despite the current trend, a return to a consistent downtrend is not guaranteed. The tariffs announced on Monday will take effect in 30 days. If trade tensions escalate further before then, sentiment towards Canadian assets could shift negatively, irrespective of oil prices or interest rate movements.
While the current trend favors a stronger Canadian dollar, underlying risks require careful assessment. Uncertainties surrounding the USMCA trade agreement renewal and potential tariff discussions remain significant factors that could strengthen the US dollar if tensions increase.
Market expectations indicate that the Bank of Canada (BoC) might maintain a supportive monetary policy stance, influenced by recent lower domestic consumer price index (CPI) figures. In contrast, persistent US inflation data suggests the Federal Reserve is likely to continue its restrictive monetary policy for a longer period.
Investors should consider USD/CAD with a balanced view. Those expecting further gains in the Canadian dollar might explore strategies that leverage CAD strength, such as hedging US dollar exposure or investing in Canadian assets sensitive to commodity prices.
Effective risk management remains crucial. Diversification and close attention to central bank statements, oil market developments, and trade news will be essential for navigating market fluctuations. Adopting a flexible approach that adapts to evolving data, rather than making large directional bets, is likely to better serve long-term investment goals.
The recent weakness in the US dollar suggests a potential return to the late June to mid-July downtrend if current momentum continues.
Trade tensions related to the USMCA, geopolitical shocks in the energy sector, and differing monetary policies between the Federal Reserve and the Bank of Canada present notable risks of upward movement for the pair.
A potentially cautious Bank of Canada alongside a hawkish Federal Reserve could limit severe downside losses for USD/CAD.
