The Canadian dollar ended Monday at its weakest closing level of the year, falling to 71.67 cents U.S. as pressure continued to build on the currency.
Economists at National Bank of Canada pointed to an unusual driver behind the decline: gold. While the loonie has traditionally been closely linked to oil, its recent weakness appears more connected to the drop in bullion prices.
Gold becomes a bigger factor
National Bank chief economist Stefane Marion and senior economist Kyle Dahms said the Canadian dollar has been the weakest reserve currency in recent weeks.
They noted that the loonie’s relationship with gold has strengthened sharply, while its historical connection with crude oil has weakened.
A break from the 2022 oil shock
This marks a notable shift from the previous oil shock in 2022, when Russia’s invasion of Ukraine sent energy prices higher and the Canadian dollar moved more closely with oil.
In recent months, however, the rolling correlation between daily moves in the loonie and West Texas Intermediate crude has turned negative.
Bullion retreat hurts sentiment
Gold has fallen 20% from its all-time high of about US$5,400 an ounce.
That decline has become a stronger headwind for the Canadian dollar, according to Marion and Dahms, as investors appear to be treating bullion as a more important signal for the currency than crude oil.
Safe-haven demand lifts the U.S. dollar
The loonie had reached a year-to-date high of 74.1 cents U.S. in late January.
Since then, it has lost about 3% as investors moved into the U.S. dollar for protection during the market turmoil triggered by the Iran conflict.
Recovery fades by June
From early April to early June, the Canadian dollar managed to regain part of its earlier losses.
That rebound has now disappeared, leaving the currency back under pressure as global uncertainty, weaker commodities and domestic economic concerns weigh on sentiment.
Growth and rate spreads add pressure
National Bank’s economists said several other factors are also working against the Canadian dollar.
Among them are deteriorating economic growth and unfavorable interest rate spreads between two-year Government of Canada bonds and two-year U.S. Treasury yields.
U.S. yields remain more attractive
The two-year U.S. Treasury yield stands at 4.2%, compared with 2.9% for comparable Government of Canada bonds.
That gap makes U.S. dollar assets more attractive to investors and adds another source of pressure on the Canadian currency.
Recession debate complicates the outlook
Canada’s economy contracted in the first quarter after also shrinking in the final quarter of last year.
That sequence has prompted talk of a technical recession, commonly defined as two consecutive quarters of negative gross domestic product growth.
Jobs data weakens the recession argument
Marion and Dahms cautioned that the recession narrative is not entirely convincing.
Statistics Canada reported on June 5 that the economy added 88,000 jobs in May and that the unemployment rate declined, making it harder to argue that the downturn is broad-based.
U.S. growth looks stronger
Even so, the comparison with the United States remains unfavorable for Canada.
The U.S. Bureau of Economic Analysis estimates real GDP growth at 1.6%, a pace that would significantly exceed Canada’s current growth performance.
Trade talks could shape the rebound
National Bank expects the Canadian dollar to recover to 74 cents U.S. by the end of the year.
That outlook depends heavily on a successful review of the Canada-U.S.-Mexico Agreement and a clearer trade path with the United States.
Loonie likely remains under pressure
For now, the economists expect the Canadian dollar to stay weak.
They said appreciation should eventually resume, but a sustained rally will likely require Ottawa to secure a trade agreement with Washington this summer.
A currency caught between gold, growth and trade
The Canadian dollar’s weakness reflects more than a single market move.
Falling gold prices, stronger U.S. safe-haven demand, wider interest rate spreads, weaker Canadian growth and trade uncertainty are all combining to keep the loonie under pressure near its lowest level of 2026.
