Risk rally offers only limited support
The Canadian Dollar strengthened slightly against its US counterpart, but failed to match the gains seen in other risk-sensitive currencies such as the Australian Dollar.
Markets have responded positively to the apparent end of the war with Iran, yet the loonie’s close relationship with oil has limited its participation in the broader risk rally.
Crude collapse weighs on the loonie
West Texas Intermediate crude fell $4.46 to approximately $80.42 per barrel as traders anticipated the return of oil shipments through the Strait of Hormuz.
The decline removes a major source of support for Canada’s currency because energy remains one of the country’s most important exports.
Although lower geopolitical risk normally benefits growth-sensitive currencies, the direct impact of weaker crude prices has kept the Canadian Dollar comparatively subdued.
Hormuz reopening remains uncertain
President Donald Trump has repeatedly said the strait is already open, but a US military statement indicated that normal passage had not yet resumed.
Some reports suggest commercial traffic could restart on Friday after the peace agreement is formally signed. Other sources indicate that reopening may take as long as 30 days.
The conflicting timeline means oil markets could remain volatile while shipping companies wait for security guarantees, mine clearance and lower insurance risks.
Other Canadian exports could benefit
A stable reopening of Hormuz would reduce risks to global growth and could support demand for several Canadian exports beyond crude oil.
Gold, industrial metals, agricultural goods and other commodities may benefit if international trade improves and investors become more confident about the economic outlook.
A broader reduction in emerging-market risk could also encourage capital to move away from the US Dollar, which would offer some indirect support to the loonie.
USMCA may become the next major threat
The larger risk for the Canadian Dollar could soon shift from the Middle East to North American trade policy.
Trump is expected to focus more heavily on the review of the United States-Mexico-Canada Agreement once the Iran conflict is no longer dominating the agenda.
A complete collapse of the agreement appears unlikely, but negotiations could still become highly confrontational.
Withdrawal threat could pressure CAD and MXN
Trump could announce that the United States intends to leave the trade agreement in six months and then use the threat as leverage during negotiations.
One possible date for such an announcement would be July 1, which would place the potential withdrawal at the end of the year.
Even if a revised agreement were ultimately signed, the initial headline would probably weaken both the Canadian Dollar and the Mexican Peso.
Canadian data sends mixed signals
Canada’s domestic economy remains stable enough to avoid immediate concern, but growth is far from strong.
The latest employment report was encouraging, while inflation remains somewhat elevated. Falling oil prices should eventually reduce some of that inflationary pressure.
At the same time, gross domestic product has contracted during the past two quarters. The most recent decline was limited to an annualized 0.1%, but it still confirmed a period of economic weakness.
Second-quarter rebound may lack strength
Forward-looking indicators suggest activity could recover during the second quarter.
However, the anticipated rebound is not expected to be especially powerful, and uncertainty surrounding the USMCA review is discouraging investment and business confidence.
This combination leaves the Bank of Canada with an economy that is improving, but not rapidly enough to provide a clear bullish catalyst for the currency.
Technical trend still favours USD/CAD
USD/CAD continues to produce a sequence of higher highs, including the upward breakout recorded last week.
The pair has built momentum toward the November peak near 1.4130. That area could become an important resistance level for traders considering short positions.
Until the pair reaches that zone or a stronger Canadian catalyst emerges, the technical picture remains more supportive of the US Dollar.
Longer-term outlook may improve
The Canadian Dollar could become more attractive later in the year and into 2027 if uncertainty surrounding the USMCA review begins to clear.
A more stable trade relationship, stronger domestic growth and continued demand for Canadian commodities would improve the outlook.
For now, however, falling oil prices and the threat of renewed trade tensions leave little reason for investors to make an aggressive move into the loonie.
