The textbook calls the Canadian dollar a petrocurrency, which means that with war in the Middle East keeping the price of oil up, the Loonie should hold. Instead, it spent this week falling to a fresh 14-month low against the US dollar, ending a streak in which the US dollar has closed higher for six of the last seven weeks. The playbook is wrong, at least for now: Loonie has quietly stopped trading like a proxy in the oil market, and its weakness has been driven by two forces that have nothing to do with the price of a barrel.
Petro-currency in name only
For years, Loonie moved on a barrel price; this relationship has quietly reversed. The rolling correlation between daily currency movements and crude oil has turned negative in recent months, a marked departure from the historical norm. In its place, a less obvious driver took over: Gold. Canada is a major producer of bullion; with the gold price falling for six weeks in a row and well off its recent record high, the slippage has become a real drag on the currency. The market has swapped one commodity anchor for another; traders still only looking at the barrel missed it.
Two central banks are drifting apart
The second force is doing the most damage: the widening rift between the Federal Reserve (Fed) and the Bank of Canada (BoC). The Fed kept its interest rate at 3.75% this month and revised its scatter chart upwards, with markets pricing in a possible hike in 2026; BoC at 2.25% is going nowhere. It persisted again this month, caught in a two-way link between a benign domestic economy and fresh, buoyant inflation, and has signaled no intention to change direction. When one central bank is inclined to escalate and the other is frozen, there is an interest rate spread; right now he’s pointing straight at Loonie. As a result, speculative brief positions in this currency have reached their highest levels in months.
Surpassed, but not without a word
This move is striking because it is not simply a story about the disintegration of Canada. The domestic picture is mixed rather than disrupted: forceful May employment reports accompany Friday’s delicate retail sales results; the Loonie slide owes more to its relative position than to its complete collapse. This also means the currency has a busier week ahead than the bears might like.
The Canadian May Consumer Price Index (CPI) hits Monday at 12:30 GMT. With inflation already running near 3% due to increased energy costs, a heated print would feed the BoC’s inflation side and could give Loona a scarce bargain; Gov. Macklem next speaks on Tuesday. The dominant event continues to take place south of the border: at 12:30 GMT on Thursday, the United States reports its third gross domestic product (GDP) estimate for the first quarter, alongside the May Personal Consumption Expenditures (PCE) price index, with core PCE accelerating to 0.3% m/m. The heated PCE rate in the US further widens the exchange rate gap and further points to a rise in the USD/CAD rate; it’s only the really heated Canadian CPI on Monday that gives Loonie much to fight for.
Resistance: USD/CAD is pushing at 1.4200 after this week; a neat break opens at 1.4250 and then 1.4300, levels last seen well over a year ago.
Support: Initial support is near 1.4100, then 1.4050; only a move back below 1.4000 would suggest that the Loonie has found real support.
Deviation: higher for USD/CAD as the Fed-BoC gap widens and gold remains high, meaning further Loonie weakness is on the cards. The only note concerns positioning: the daily Stochastic Relative Strength Index (Stoch RSI) is deeply overbought after an almost vertical escalate; a pointed but shallow retracement towards 1.4100 would not be surprising. The catalyst most likely pushing the pair towards 1.4250 will be the heated PCE rate in the US next week.
USD/CAD hourly chart
Canadian Dollar FAQs
The key factors shaping the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of crude oil, which is Canada’s largest export, the condition of its economy, inflation and the trade balance, i.e. the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are taking on riskier assets (with risk) or looking for secure havens (with risk), with risk being positive relative to CAD. As the United States’ largest trading partner, the health of the U.S. economy is also a key factor influencing the exchange rate of the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The main goal of the BoC is to keep inflation at 1-3% by raising or lowering interest rates. Relatively higher interest rates tend to benefit CAD. The Bank of Canada may also utilize quantitative easing and tightening to influence lending terms, with the former being CAD negative and the latter CAD positive.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil usually has a direct impact on the value of CAD. Generally speaking, if the price of oil increases, CAD also increases because aggregate demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which also supports CAD.
While inflation has always traditionally been considered a negative factor for currency because it reduces the value of money, in newfangled times the opposite has been true with the relaxation of cross-border capital controls. Higher inflation prompts central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases are used to assess the condition of the economy and may affect the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of CAD. A forceful economy is good for the Canadian dollar. Not only will it attract more foreign investment, but it could encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is delicate, CAD will likely decline.
