The USDCAD has pulled back this week after reaching its highest level since early last year. While this move may be technical, traders are now asking whether fundamentals support a trend reversal or if the pair will resume its climb. Key Canadian data due this week could shape the outlook for the loonie ahead of next week’s Bank of Canada rate decision.
The Canadian dollar has remained one of the weakest major currencies for several reasons. Lower crude oil prices continue to hurt Canada’s terms of trade. At the same time, weak economic growth and slow hiring have kept consumer demand subdued. Meanwhile, the stronger US dollar continues to outperform the loonie.
Evolving Central Bank Outlook
Most economists expect the Bank of Canada to leave interest rates unchanged for the rest of the year. In contrast, markets expect the Federal Reserve to raise rates by December. That widening interest rate gap continues to favour the US dollar and supports USDCAD.
However, any shift in that outlook could change the pair’s direction. Canada’s labour market remains a key factor. Although the Bank of Canada does not have the Fed’s dual mandate, stronger employment would support consumer spending and inflation, reducing the case for future rate cuts.
What the Market Is Watching
Friday brings Canada’s final major data release before next week’s Bank of Canada meeting. The employment report will likely set the tone for expectations.
If unemployment remains stable, markets will probably continue to expect the Bank of Canada to keep rates unchanged. If inflation slows further as energy prices ease, policymakers could eventually consider rate cuts. That scenario would likely keep the Canadian dollar under pressure.
A meaningful drop in unemployment would strengthen the case for the loonie and could shift USDCAD lower.
Economists expect Canada’s economy to lose 15,000 jobs in June after adding 154,000 positions in May. However, May’s result was unusually strong. Analysts also expect the unemployment rate to remain at 6.6%, although many forecast a rise to 6.7%. A modest increase would likely have little impact on market expectations.
Political Uncertainty Keeps Traders Cautious
Political developments continue to cloud Canada’s outlook. The Middle East conflict remains unpredictable, leaving uncertainty over when normal fuel shipments through the Strait of Hormuz will fully resume.
Trade negotiations also remain a major risk. Canada and the United States continue to renegotiate the USMCA, while tariff uncertainty persists. US President Donald Trump’s negotiating style often creates periods of heightened market uncertainty before agreements are reached. That approach could generate additional negative headlines for the Canadian dollar.
These risks explain why many investors remain cautious about betting on a sustained recovery in the loonie. Even strong economic data may struggle to overcome political uncertainty, which is likely to influence Canada’s economic outlook in the months ahead.
