Canadian Dollar Performance
The Canadian Dollar (CAD) increased by 0.66% against the US Dollar on Friday, reaching a 22-week high. This rise occurred as global market flows shifted away from the US Dollar amid reduced trade war tensions following changes in tariff policies.
Next week, the Bank of Canada (BoC) will announce its latest interest rate decision, coinciding with the release of Canadian Consumer Price Index (CPI) data. The BoC faces scrutiny over whether to adjust rates following a series of cuts, particularly in light of potential economic impacts from US tariffs.
Recent US economic data showed a decline in Producer Price Index (PPI) inflation, and consumer sentiment has also worsened, adding uncertainty. Canadian CPI figures expected next week may influence the BoC’s rate strategy ahead of its decision.
The CAD’s performance dragged USD/CAD down by 2.3% weekly, marking the pair’s fifth consecutive week of decline. Technical indicators suggest that USD/CAD may struggle to remain above key levels, exploring lows below 1.3900.
Key factors affecting the CAD include BoC interest rates, oil prices, economic health, inflation, and trade balance. The CAD typically strengthens with higher oil prices, as Canada relies heavily on petroleum exports.
The BoC’s interest rate policy significantly impacts the CAD, as higher rates generally attract foreign investment, increasing demand for the currency. Additionally, macroeconomic data such as GDP and employment figures play a role in determining CAD value, with strong economic performance usually supporting a stronger currency.
Market Implications
With the Canadian dollar reaching levels not seen in over five months, the market’s reaction last week has already started to shift directional expectations. That 0.66% weekly gain came not just from domestic strength, but equally from a weaker US dollar, which softened on the back of easing trade tensions and disappointing inflation data south of the border. As a currency so closely tied to both commodity prices and external demand shifts, it’s unsurprising that these broader drivers have had such a noticeable effect.
Looking ahead, the upcoming week offers a potentially high-volatility setup, with the Bank of Canada’s policy statement and CPI data both dropping within a short window. What markets have already priced in is a fairly dovish stance; however, recent gains suggest a reassessment of expectations may be underway. If CPI undershoots projections, that could reinforce the current trajectory of rate pausing or even renewed easing, depending on how global pressures develop in coming months. However, if inflation surprises to the upside, especially in any trimmed or core measure, it would make it more difficult for the BoC to leave rates untouched. That’s where pricing risks start to matter more than narrative.
USD/CAD’s breakdown below psychological and technical levels—most notably the multi-month low stretch under 1.3900—hasn’t happened in isolation. Traders should acknowledge that this move has been steady and clean, with five consecutive weeks pushing lower. From a momentum standpoint, that signals trend continuation unless there’s a compelling catalyst to reverse the direction. We are keeping an eye on volume divergence in any corrective rallies, but as it stands, the path of least resistance still points downward absent a surprise.
Energy markets offer a parallel guide. Oil prices haven’t become a full-fledged driver of CAD strength lately, but their stability offers a supportive base. Since Canada’s export receipts are so closely tied to crude income, any sustained uptrend in Brent or WTI pricing will naturally lend weight to further gains in the domestic currency. It’s not always a one-to-one relationship, but directionally the effects are reliable over longer periods.
The BoC, under increased pressure from international monetary shifts and domestic inflation data, is walking a line between growth support and inflation control. Macklem and his team will be aware that each rate move sets expectations for quarters ahead. Recent employment figures, while strong in some parts of the country, have shown mixed signals in terms of wage pressure and labour market slack. Those mixed signals mean we’ll be cautious assigning too much weight to any single dataset, especially in this environment.
When we look at option skew across shorter expiries, we’re seeing increased demand for downside USD/CAD protection, which reflects current sentiment. For now, spot price action and implied vols are telling similar stories. The response to CPI will be pivotal as it will become one of the last key data points before BoC decisions are fully priced into the front end. Until then, positioning needs to stay nimble, especially around expiry windows where gamma can cause exaggerated intraday swings.
In the bigger picture, our focus remains on relative growth rates, not just policy differentials. If the US continues to post weaker inflation and sentiment readings, like the recent PPI disappointment and softness in consumer outlooks, the support for the greenback will erode further. These trends, when placed alongside Canada’s more resilient fundamentals, can deepen the current trajectory.
We keep duration light in our directional exposures and have paid particular attention to the widening basis market, which shows a clear tilt favouring CAD assets. Watch relative yield spreads carefully. They are moving not just on BoC expectations but from a backdrop where Fed commentary is inching slowly toward a more neutral stance. These are the weeks when dislocations between macro drivers and price signals can offer some of the cleaner opportunities. Keep execution tight and don’t chase bounces unless they’re paired with confirmed volume expansion and data support.
