- Robust Canadian economic data and broad U.S. dollar weakness outweighed falling crude oil prices, pushing USD/CAD down toward two-month lows
- Key upcoming catalysts include Wednesday’s US CPI release and new 50% US tariffs on Canadian goods effective August 19, both pivotal for direction
- Holding U.S. dollars carries risks from Federal Reserve rate cuts, whereas Canadian dollar exposure remains vulnerable to falling energy prices and trade friction
Oil prices have fallen notably in recent weeks due to changing dynamics in the Middle East and evolving supply expectations. Despite this, the Canadian dollar has strengthened against the US dollar more than anticipated, with USD/CAD trading around 1.393, a level not seen in approximately two months.
This divergence suggests that oil prices are not the sole driver of the Canadian dollar’s performance. Other factors are providing more substantial support for the Canadian currency in the current market conditions.
Oil Is Down, But That’s Not the Story Right Now
WTI crude’s been on a bumpy ride lately. After hitting a late July high near $86.89, it fell to about $74.30 in early August, though it’s since found its footing in the upper $70s. This dip came as Middle East tensions eased, partly due to a U.S.-Iran memorandum that calmed fears about Strait of Hormuz disruptions. Record U.S. output and expected inventory surpluses also played a part.
Ordinarily, a drop like that would hurt the loonie. But the currency has mostly shrugged it off.
Several key macro factors are insulating the Loonie from the recent slide in oil prices. For one, Canada’s own economic data has given the currency a lot of support. Strong domestic job numbers and steady GDP growth have boosted confidence in the country’s economic health.
Interest rate differences still favor the US dollar, as the Federal Reserve’s policy rate is higher than the Bank of Canada’s 2.25% target. While the Fed remains cautious, commentary from Vantage Markets suggests the Bank of Canada’s policy rate has reassured investors, signaling that Canadian rates have stabilized.
What to Watch in the Coming Weeks
A few things could quickly change this situation. For one, everyone will be watching Wednesday’s US CPI release. A hot inflation number there could bring back Fed rate-hike expectations and give the dollar another boost.
Additionally, new U.S. tariffs of 50% on approximately $20 billion of Canadian goods are set to take effect on August 19. Unlike previous measures, these tariffs will apply even to goods that typically receive preferential treatment under the CUSMA trade agreement.
This presents a significant challenge for Canadian exporters and could exert downward pressure on the Canadian dollar once the tariffs are fully implemented.
Furthermore, the Bank of Canada’s interest rate decision on September 2 is approaching. The consensus among most analysts is that the bank will maintain its current rate of 2.25% as it continues to assess the impact of the tariffs.
Risks in Holding Either Currency
If you hold Canadian dollars, you’re exposed to how commodity prices move. If oil prices fall for a while, it would hurt export earnings and the Canadian dollar. Trade uncertainty or weak Canadian economic news could also undo recent gains.
On the other side, the US dollar remains susceptible to weaker US economic indicators or a shift in Federal Reserve policy towards a more accommodative stance. Geopolitical risks can sometimes support the dollar as a safe-haven asset, while at other times, they can boost oil prices and the Canadian dollar.
Speculative positioning adds another wrinkle. Traders have been betting against the Canadian dollar more heavily than almost any other major currency. This means if something good happens for Canada, those bets could quickly unwind, causing sharp, exaggerated moves in the Canadian dollar in either direction.
Stronger Canadian July jobs data, lower unemployment and relative US dollar softness have outweighed oil weakness in supporting the loonie recently.
A weakening labor market and softer inflation data could deepen Fed rate-cut expectations, extending recent dollar weakness against major currencies including CAD.
A sustained decline in oil prices, weaker domestic data or escalated trade tensions could reverse recent CAD strength against the US dollar.
