What is driving CAD weakness

The Canadian dollar has weakened further, with USD/CAD trading near multi month highs, and the move is being driven far more by global forces than by domestic Canadian fundamentals.

What is driving CAD weakness

1. A structurally strong US dollarThe US dollar continues to attract outsized demand as global investors move into safe haven assets. Escalating geopolitical tension in the Middle East, uncertainty around global growth, and disruptions to key trade and energy routes have reinforced USD’s role as the world’s primary refuge currency. Even commodity linked currencies like CAD are struggling to compete with USD liquidity and safety during risk off periods.

2. Rate divergence still favors the USThe Federal Reserve is holding rates at restrictive levels for longer as inflation risks remain elevated. In contrast, the Bank of Canada has been more cautious, balancing sticky inflation against signs of slowing domestic growth. This rate gap matters because global capital continues to favor higher yielding US assets, creating persistent demand for USD over CAD.

3. Middle currencies are being sidelinedIn volatile environments, markets tend to rotate away from so called middle currencies like CAD. These currencies are neither true safe havens nor high growth risk currencies, which leaves them vulnerable when capital concentrates at the extremes, either into USD or select higher beta assets once risk appetite returns.

Why oil above $100 is no longer supporting the loonie

Traditionally, rising oil prices have provided a reliable tailwind for the Canadian dollar. That relationship has weakened.

Even with oil trading above $100 per barrel due to Middle East supply concerns, the loonie has failed to rally meaningfully. Recent market commentary highlights several reasons for this disconnect.‍

• The current oil rally is driven by geopolitical risk rather than strong global demand. Markets view this as inflationary and growth negative rather than constructive for commodity currencies.
• Safe haven flows into USD are overpowering oil related support for CAD.
• The United States is now a major energy producer and exporter, meaning higher oil prices increasingly support USD as much as CAD.
• Investors are focused on recession risk, inflation persistence, and central bank policy rather than trade balance improvements from higher oil revenue.

In short, oil is no longer enough on its own to lift the loonie when global uncertainty is dominating capital flows.

What this means for businesses

With USD/CAD elevated and CAD struggling to benefit from traditional supports, currency volatility has real cost implications for Canadian companies.