Weaker Canadian rate expectations and oil price volatility weigh on the loonie despite improving GDP and labor market trends.
The Canadian dollar remains one of the worst-performing G10 currencies this year, despite signs of recovery in Canada’s real economy. Recent labor market data, GDP surprises, and stronger PMI readings point to improving conditions, yet the CAD continues to underperform due to unattractive interest rate expectations relative to the US and reliance on oil prices.
Market expectations for the Bank of Canada have shifted, with rate cut bets now trailing even those for the Bank of Japan. Meanwhile, the Federal Reserve is priced for more hikes, widening the USD/CAD spread. Commerzbank forecasts EUR/CAD at 1.60–1.62 and USD/CAD easing toward 1.35 by late 2027.
Oil price volatility, particularly tied to geopolitical risks like the Strait of Hormuz, continues to drive CAD movements. However, the currency’s weakness persists despite higher energy prices, reflecting broader market skepticism about Canada’s monetary policy outlook.