Higher oil prices have supported the Canadian Dollar after a long period of weakness. This support is described as temporary unless Canada’s real economy improves enough to allow interest rate rises.
USD/CAD is said to be trading near a forecast level for the end of September. A forecast of 1.37 for USD/CAD is maintained for the first half of the year.
USMCA talks are due to begin in July and are presented as a source of uncertainty for the Canadian Dollar. The Canadian economy is described as fragile, with setbacks in the currency pair still possible.
The report notes that Canada depends more on energy exports than the US, which could matter during an oil price shock. It also states that the Canadian Dollar rarely moves independently from the US Dollar because the two economies are closely linked.
Lower USD/CAD levels are expected only in the second half of the year. This is linked to clearer timing for Bank of Canada rate rises and the completion of trade negotiations.
We are looking at an analysis that correctly identified key risks for the Canadian dollar last year. The core idea was that high oil prices offered only a temporary boost to the CAD, with a weak economy and trade uncertainty posing greater threats. This perspective guided our view for much of 2025.
From our viewpoint in mid-2025, the concerns over the USMCA negotiations were justified, creating volatility and capping CAD strength. The Canadian economy did appear fragile for a time, which kept the Bank of Canada on hold and supported a higher USD/CAD exchange rate through the third quarter. This validated the forecast for limited downside at the time.
However, the situation has now shifted significantly from what we saw last year. The Bank of Canada has become much more assertive, hiking its policy rate in both January and March to combat persistent inflation, which Statistics Canada reported was still at 3.1% in April. This monetary policy divergence from the previous year is now a primary driver for the currency.
The argument for a fragile Canadian economy is also losing its credibility. First-quarter GDP data for 2026 showed the economy expanding at an annualized rate of 1.8%, beating expectations and signaling underlying resilience. This strength persists even as WTI crude oil prices have softened from their 2025 peaks to around $78 per barrel.
For derivative traders, this means the reasons to be cautious on the Canadian dollar have diminished. The focus has moved from economic weakness to a central bank actively fighting inflation. We should therefore consider positioning for further CAD strength, or at least an end to its prolonged depreciation against the USD.
Strategies should now pivot towards capturing potential downside in the USD/CAD pair. Traders could look at buying CAD call options to profit from a move lower with defined risk. Selling USD/CAD call spreads would also be a viable strategy to capitalize on the view that the pair’s upside is now limited by a hawkish Bank of Canada.
