National Bank of Canada says the Canadian dollar has recently been the weakest-performing reserve currency, with USD/CAD returning to about 1.39, a level last seen at the end of March during the equity sell-off that followed the closure of the Strait of Hormuz. The bank links the move to softer relative real growth and a negative Canada–U.S. 2-year spread, which continues to weigh on the currency even as full-time employment sits at a record high.
Commodities are also shaping price action. Oil remains relevant for Canada, but the bank argues gold has been the marginal driver in the current set-up; bullion is in a downtrend and is now more than 17% below its recent record high, a dynamic it associates with CAD weakness. Looking ahead, it projects USD/CAD at 1.35 by year-end, and says any durable CAD recovery would depend on Ottawa securing a trade accord with the US this summer, while geopolitical risks and Canadian firms’ access to the US market remain sources of uncertainty.
Economic And Yield Divergence Fuels Loonie Weakness
We see the Canadian dollar remaining under pressure in the coming weeks, holding as the weakest reserve currency with USD/CAD hovering near 1.39. The economic picture supports this, as Canada’s Q1 2026 GDP growth was reported last week at a sluggish 0.5%, a stark contrast to the robust 2.8% growth seen in the United States. This divergence is a key reason we expect the trend to continue.
The interest rate spread between Canada and the U.S. is a major headwind for the loonie. As of this morning, the yield on the U.S. 2-year bond is a full 65 basis points higher than its Canadian equivalent, making the U.S. dollar more attractive for investors seeking yield. Historically, such a wide negative spread, similar to the period in 2017-2019, has consistently applied downward pressure on the Canadian dollar.
Commodities, Gold, And Trade Uncertainty Impact Outlook
Gold has also become a more critical driver for the currency than oil in the current market. Bullion is down more than 17% from its recent record high, now trading around $2,450 per ounce and struggling to find support. We believe any further weakness in gold will directly translate into a higher USD/CAD rate.
Given this backdrop, we feel that derivative traders should consider positioning for continued Canadian dollar weakness. Buying call options on USD/CAD for late summer expirations seems like a sensible strategy to profit from a potential move higher, especially with uncertainty around a new U.S. trade accord. A sustained rally for the loonie will likely require a significant breakthrough in those trade negotiations, which we do not see as imminent.
