Analysts argue recent Canadian dollar weakness driven by exaggerated Fed hike expectations and oil price declines lacks fundamental support.
USD/CAD climbed from below 1.36 to above 1.42 since early May, pressured by falling oil prices and rising Fed rate hike expectations. The pair’s surge reflects market pricing of 40 basis points in Fed tightening by March 2025, alongside a sharp drop in oil to near pre-war levels.
Earlier in April, the Canadian dollar strengthened as oil exports and geopolitical tensions pushed USD/CAD below 1.36. However, oil prices have since retreated, eroding the loonie’s support. Despite the shift, analysts see current drivers as overstated, with no imminent Fed hikes expected.
Commerzbank’s Michael Pfister argues the market reaction is exaggerated, citing limited further upside for USD/CAD unless new negative CAD-specific developments emerge. The Strait of Hormuz reopening may have triggered an overcorrection in oil markets, delaying stockpile replenishment.