The Canadian Dollar (CAD) strengthens against the US Dollar (USD), continuing a five-day rally. USD/CAD has decreased nearly 1.30% this week, falling below the 1.3800 mark as market participants responded to mixed Canadian Retail Sales data.

Canadian Retail Sales increased by 0.8% in March, exceeding the anticipated 0.7% growth, marking a recovery from February’s revised -0.5% decline. However, when excluding autos, sales fell by -0.7%, indicating a decline in consumer spending in other sectors.

Canadian Dollar Strength

The US Dollar’s weakness further supported the Canadian Dollar’s upward trend. The US Dollar Index dropped to a two-week low, close to 99.40, driven by mounting fiscal risks and tariff uncertainties, including proposed tariffs on imports from the European Union and Apple products.

The Canadian Dollar showed the strongest performance against the US Dollar. In the daily percentage change chart, CAD appreciated against multiple major currencies, reflecting its strengthened position on the forex market amidst broader economic developments.

This recent movement in USD/CAD reflects more than just a temporary blip—it points to a shift triggered by a combination of domestic strength in Canada and external fragility in the US. The CAD’s appreciation across multiple currencies, not just the greenback, underlines the broader sentiment swing rather than a one-off reaction to single-market data.

Canadian retail sales did edge past expectations on the headline number, with a monthly gain of 0.8%, slightly above the 0.7% the market had been anticipating. That’s certainly a positive, but we didn’t miss that stripping away the motor vehicles category reveals a -0.7% contraction. That details a more nuanced picture; while activity has picked up with cars and possibly related financing, other parts of the consumer sector appear to be slowing. From our perspective, this divergence alerts us to maintain a counterbalanced exposure when weighing macro trends—headline support will only last as long as broader consumption doesn’t deteriorate further.

In parallel, the Dollar has fallen under pressure. Fiscal concerns are taking more oxygen out of the air than they have in recent weeks. With ongoing noise around public debt trajectory and potential new trade frictions—including fresh talk of tariffs on EU goods and key tech imports—there’s little cushion underneath the Dollar right now. The US Dollar Index slumping to near 99.40 confirms this vulnerability. From a tactical point of view, we’ve shifted part of our options bias, now leaning marginally against further USD strength unless there’s a meaningful catalyst ahead from US macro releases.

Resilience Of The Loonie

What’s notable—and we’re tracking this closely—is that CAD hasn’t just advanced against the USD. It’s showing resilience more broadly. This has led us to consider how commodity linkages and policy divergence could further support the Loonie. Oil, still a bedrock driver, remains firm. That gives underlying support even if domestic consumption figures wobble.

In the derivatives space, we’ve observed tighter implied volatilities on longer-dated USD/CAD contracts, while the front-end has remained active. That’s an indication expectations have become more anchored on a lower USD/CAD floor in the short term. Skew also shows call premium thinning, which implies fading protection demand against a CAD retracement. We’ve leaned into that, reducing downside hedges, but only moderately, as cross-asset flows this month suggest risk sentiment could wobble quickly.

Markets have clearly re-rated Canadian monetary conditions. The Bank of Canada has room to manoeuvre and that’s feeding sentiment, even if the retail data shows some fragility. Meanwhile, with US trade policy back in headlines, short-term positioning in FX futures has begun reflecting cautious Dollar sentiment. We’ve held steady here, watching closely for direction ahead of key inflation prints due in early June.

We’re not ignoring liquidity tacticalities either. Interbank volumes have been skewed to the long-CAD side, but not by such a margin to suggest speculative froth. That tells us this move likely has more to run, though it may hit friction if US macro surprises resurface.

For now, our focus is to manage gamma exposure in weekly options, as short-term event risk has risen but longer-term drift still favours CAD strength. This is a window rather than a conclusion.

Create your live VT Markets account and start trading now.