The Canadian dollar weakened further as softer oil prices and geopolitics lifted USD/CAD to a new year-to-date high, after the pair briefly moved around 1.39 near the Bank of Canada policy announcement but failed to hold. Late-afternoon trading saw renewed CAD losses as markets grew concerned about additional US strikes on Iran, while Governor Macklem’s cautious tone on the policy outlook did not prevent the slide.
Overnight, CAD selling tracked the NOK as Brent and WTI prices fell. Earlier neutral-to-bearish, USD-negative signals did not support the currency, and a break above the March peak at 1.3967 left USD/CAD positioned to test the 1.40–1.41 congestion area from Q4, despite overbought conditions. Support is flagged at 1.3900, and the USD is described as at its best level since early December, with firmer equities and a lower VIX framed as potential stabilisers for the CAD.
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Canadian Dollar Outlook and Drivers
Given the current environment, we believe the Canadian dollar is facing a “heads I win, tails you lose” situation, making it vulnerable to further losses against the US dollar. The USD/CAD pair has broken through its March highs, signaling strong upward momentum. Our focus in the coming weeks is positioning for a continued move towards the 1.40-1.41 resistance zone.
The primary pressure on the loonie is coming from softer oil prices, with WTI crude futures for July delivery recently falling below $78 a barrel, a significant drop from the highs seen in early May. This trend is dragging down commodity-linked currencies, and we are seeing the CAD weaken in lockstep with the Norwegian krone. Even with the VIX volatility index holding at a relatively low 16, risk appetite isn’t translating into support for the Canadian dollar.
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Monetary Policy Divergence and Trading Strategy
Adding to the weakness is the Bank of Canada’s cautious tone from its June 10th policy meeting. With Canada’s latest monthly GDP figures showing a slight contraction of 0.1% and inflation hovering just below the 2% target, the central bank has little incentive to turn hawkish. This policy divergence with the U.S. Federal Reserve, which remains focused on inflation, continues to favor the greenback.
From a trading perspective, we are looking at buying USD/CAD call options with strike prices around 1.4050 and expiries in late July or August. This strategy allows us to profit from the expected upward move while managing risk. The dollar is technically overbought according to the Relative Strength Index (RSI), so a short-term pullback is possible, but we see the underlying trend remaining firmly bullish.
This price action is reminiscent of the run-up we saw in late 2024 when similar concerns about global growth weighed on oil and the CAD. We will use the 1.3900 level as a key support area. A break below that would cause us to reassess, but for now, any dips towards that level look like buying opportunities.
