USD/CAD slides toward 1.41 as surging oil prices boost Canadian dollar

The Canadian dollar is extending its recovery from June lows as rising crude prices and improving risk sentiment drive USD/CAD toward the 1.41 handle.

The US dollar fell to around 1.4140 against its Canadian counterpart Monday, extending a retreat from June's highs above 1.42 as surging oil prices strengthened the loonie. WTI crude has climbed more than 5 percent over the past two weeks, benefiting from tightening supply expectations and seasonal demand. Canada's status as a major oil exporter means each sustained move higher in crude typically translates into a stronger Canadian dollar.

"The near-term support from higher crude is real, but we still think USMCA-related risk premium can be added throughout the third quarter," said Francesco Pesole, FX strategist at ING. "We don't expect a return below 1.40 in the next couple of months."

Scotiabank strategists said the Canadian dollar sell-off that pushed USD/CAD above 1.42 in June may have run its course, noting that short-term US-Canada interest-rate spreads have begun reversing some of their earlier widening. From a technical perspective, a sustained move below 1.4150 would open the way toward 1.4075-1.4080, while the 1.4250-1.4300 region should cap renewed US dollar gains, the bank said.

The Bank of Canada meets next week, with markets pricing no change to the overnight rate at 3.75 percent after the central bank delivered a quarter-point cut in June. A stronger-than-expected Canadian jobs report Friday could reinforce the case for a pause, though ING argues the bar for a more hawkish stance remains high unless oil prices return to the elevated levels seen during April and May. Scotiabank economists forecast a 10,000 increase in Canadian employment for June, with unemployment holding at 6.6 percent and a modest rebound in wage growth.

The loonie has gained about 0.3 percent against the US dollar this week, outperforming most Group-of-10 peers. The euro and British pound also advanced against the greenback, reflecting broader dollar weakness as traders reassess the path for Federal Reserve policy ahead of US inflation data due later this week.

ING said uncertainty surrounding the future of the USMCA trade agreement is likely to keep a risk premium embedded in the Canadian dollar during the third quarter. The bank noted that while recent support for the loonie is encouraging, the structural headwinds from trade policy uncertainty and the potential for renewed US dollar strength limit the scope for a sustained Canadian dollar rally.

The last time USD/CAD traded below 1.40 was in early May, before a sharp sell-off that took the pair to 1.4275 by mid-June — a move of about 2.8 percent over six weeks. A return to those levels would require a clear narrowing in US-Canada rate spreads, which Scotiabank said could become more likely if upcoming US inflation data are softer than expected.

For commodity traders, the key question is whether the recent oil rally can sustain itself. WTI crude's advance has provided a tailwind for the loonie, but the durability of that support depends on supply dynamics from OPEC+ and the trajectory of global demand heading into the third quarter. If crude prices stabilize near current levels, the Canadian dollar may find a floor, though the path below 1.40 remains obstructed by trade uncertainty and the relative resilience of the US economy.

This article is for informational purposes only and does not constitute investment advice.