The Canadian dollar weakened against the US dollar on Thursday but retraced most intraday losses after reports of an Israel–Lebanon deal raised hopes of progress in the US–Iran peace plan. USD/CAD traded just above 1.3900, easing from an eight-week high of 1.3925, and it remained up 0.8% on the week. Lebanon’s President Joseph Aoun said he is awaiting responses from parties to an agreement with Israel to implement the ceasefire, while broader risk appetite stayed subdued.
US releases underpinned the dollar on Wednesday, as ADP Employment Change pointed to stronger net job gains in May and the ISM Services PMI showed firm activity alongside elevated price pressures, reinforcing the case for a near-term Federal Reserve rate rise if inflation persists. Markets next watch US initial Jobless Claims, with Friday’s Nonfarm Payrolls seen at 85K and the unemployment rate steady at 4.3%. Statistics Canada is due to report May jobs, with net employment expected to rise 10K after a 17.7K April fall, while unemployment is forecast unchanged at 6.9%; the Bank of Canada targets inflation of 1–3% and can also use quantitative easing or tightening, while oil prices and the trade balance remain key CAD drivers.
Policy Divergence Between the Fed and Bank of Canada
We are watching the USD/CAD pair closely as it trades near 1.3910, reflecting a clear divergence in central bank policy. The Bank of Canada just cut its key interest rate by 25 basis points to 4.5% yesterday, citing a softening economy. This move stands in stark contrast to the U.S. Federal Reserve’s position.
On the U.S. side, the case for a strong dollar remains firm. The latest Core PCE reading for April came in at 2.8%, still well above the Fed’s target, which supports a “higher for longer” interest rate outlook. This growing interest rate differential makes holding U.S. dollars more attractive than Canadian dollars.
Adding to the pressure on the loonie, WTI crude oil prices have recently slipped below $75 a barrel amid concerns over global demand. As oil is a major Canadian export, this price weakness directly undermines a key pillar of support for the currency. This trend further complicates the economic outlook for Canada.
Outlook for USD/CAD and Trading Strategies
The market’s immediate focus is now on tomorrow’s dueling employment reports from both nations. Current consensus expects the U.S. to have added a solid 180,000 jobs in May, while Canada is forecast to add a more modest 20,000. Any confirmation of this economic divergence will likely push USD/CAD even higher.
Given this backdrop, we see opportunities in betting on further upside for the USD/CAD pair in the coming weeks. Derivative strategies like buying call options could be used to capitalize on a potential move towards the 1.4000 psychological level and beyond. We are positioning for continued U.S. economic outperformance.
This environment is reminiscent of the 2015-2016 period, when a similar policy divergence between the Fed and the BoC caused the USD/CAD to surge from 1.2500 to over 1.4500. While history does not repeat exactly, it provides a useful template for how powerful these trends can become. We will be monitoring the upcoming data releases to confirm our thesis.
