USD/CAD rose for a second day, trading near 1.4230 on Monday and up 0.20%, as the Canadian Dollar stayed weak against a firmer US Dollar despite higher oil prices. Shipping flows through the Strait of Hormuz began normalising after weekend disruption, while OPEC+ agreed a 188K-barrel-per-day output increase for next month led by Saudi Arabia and Russia. The move has raised fresh discussion about a possible global supply surplus.
The US Dollar gained as markets positioned for further Federal Reserve tightening; the CME FedWatch tool put the probability of additional rate rises by year-end at 76.9%, with attention turning to the Fed’s June minutes due on Wednesday. US activity data were steady: the ISM Services PMI edged down to 54 in June from 54.5, in line with forecasts, as New Orders and Prices Paid softened but the Employment Index improved. Scotiabank pointed to narrowing short-term yield spreads between Canada and the US, while flagging trade uncertainty tied to confirmation of USMCA non-renewal and expectations that the BoC Business Outlook Survey will reflect a cautious backdrop; it added that the Canadian Dollar’s undervaluation has been narrowing.
Policy Divergence And Fundamental Drivers
We continue to see the US Dollar’s strength dominate the Canadian Dollar, with the pair pushing towards 1.4350. The divergence was amplified last Friday by a strong US jobs report showing 250,000 jobs added in June, contrasting sharply with Canada’s surprise loss of 5,000 jobs. This fundamental gap suggests the path of least resistance for USD/CAD remains upward.
We believe the monetary policy divergence between the Federal Reserve and the Bank of Canada is the primary driver here. With US Core PCE inflation recently printing at 3.1% for May, the market is now pricing in an 85% probability of a Fed rate hike by September, according to the CME FedWatch tool. Meanwhile, Canadian inflation has cooled to 2.5%, giving the Bank of Canada room to remain on hold.
Even with WTI crude holding firm around $85 per barrel, this is providing little support for the loonie. The overwhelming strength of the US Dollar is negating the positive impact of oil prices. Last week’s surprise build in US crude inventories further suggests that supply concerns are capping any significant oil price rally for now.
Trade Uncertainty And Strategic Positioning
We see ongoing trade uncertainty as a persistent weight on the Canadian dollar, extending the soft bias noted previously. Comments last week from a US trade representative regarding a tougher stance on lumber and dairy in USMCA renegotiations are keeping investors cautious. This environment limits any potential upside for the CAD, even if it appears fundamentally undervalued on some long-term metrics.
Given this outlook, we are looking at strategies that benefit from further advances in USD/CAD. Buying call options on USD/CAD with expirations in the next 30 to 60 days offers a defined-risk way to position for a move towards the 1.4500 level. This approach capitalizes on the expected policy divergence and persistent headwinds facing the Canadian currency.
