The Canadian dollar struggles to gain momentum despite easing geopolitical risks, as falling crude oil prices and USMCA trade concerns weigh on the loonie.
Market Movement
The USD/CAD pair edged lower on Monday, but the Canadian dollar failed to capitalize on the broader risk-on rally triggered by the de-escalation of tensions in Iran. While commodity-linked currencies like the Australian dollar strengthened, the loonie lagged due to declining crude oil prices and lingering trade uncertainties.
Factors Behind CAD Underperformance
WTI crude oil prices plunged $4.46 to $80.42 a barrel, undermining the outlook for Canada's energy-dependent economy. The potential reopening of the Strait of Hormuz, a critical oil shipping route, has reduced supply disruption fears, but conflicting signals from U.S. officials on timing—ranging from Friday to 30 days—have kept markets cautious. Additionally, the U.S. dollar faces pressure as emerging market risks ease, though the CAD's correlation with oil prices remains a key drag.
USMCA Trade Deal Risks
President Trump's focus is shifting toward renegotiating the USMCA trade agreement, raising concerns over potential disruptions. While the deal is unlikely to collapse during the current review, traders fear Trump may leverage a six-month withdrawal threat to extract concessions. A formal pullout announcement, possibly timed for July 1, could pressure the CAD and Mexican peso, adding downside risks to the loonie.
Domestic Economic Outlook
Canada's economy shows mixed signals. Inflation remains elevated but is expected to ease alongside lower oil prices. The labor market posted a strong jobs report, though GDP contracted in the last two quarters, with the most recent decline at -0.1% annualized. Forward-looking indicators suggest a Q2 rebound, but momentum is tepid amid trade policy uncertainties.
Technical Analysis
USD/CAD has formed a series of higher highs, including a recent breakout, with momentum building toward the November highs near 1.4130. Traders may lean against short positions as the pair tests key resistance levels. However, the lack of immediate catalysts limits near-term bullish conviction for the CAD.
Outlook
The Canadian dollar's prospects remain tied to oil price stability and resolution of USMCA negotiations. A clearer trade framework could support the loonie in late 2026 and 2027, but current headwinds suggest limited upside in the near term.
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