Canadian Dollar (CAD): Oil linked, policy driven and still under pressure

What’s going on?

The Canadian dollar (CAD) has faced persistent headwinds in 2025, despite occasional bursts of strength.

A key driver, unusually weak economic data from Canada, combined with a domestic energy sector under strain and policy divergence with the Bank of Canada (BoC).

According to the BoC’s own staff analysis, the CAD depreciated against the U.S. dollar by roughly 7.7% in 2024, underscoring the widening gap in monetary policy expectations.

As of mid November, USD/CAD has climbed above the 1.40 mark, signalling renewed weakness in the loonie amid subdued oil prices and mounting concerns about Canada’s rate cut trajectory.

Why it matters to everyone

• Export economy exposure: Canada’s currency is tightly linked to energy (especially oil) and commodity exports. A weaker loonie affects purchasing power for imports and constrains corporate margins in sectors reliant on U.S. dollar cost bases.

• FX risk for corporations and investors: Multinationals with Canadian exposure or investors holding Canadian assets must navigate a currency that is not behaving purely like a commodity currency policy and macro risks dominate.

• Monetary policy & carry trade implications: The loonie’s interest rate differential relative to the U.S. dollar matters for yield-seekers and FX strategy. With the BoC expected to cut while the U.S. may hold or raise, CAD comes under pressure.
  

Key drivers

• Oil price dynamics: Oil remains Canada’s largest export and a core support for the CAD. Recent rebounds in crude have offered nimble support for the loonie.

• Monetary-policy divergence: The U.S. policy interest rate is expected to end 2025 significantly above Canada’s, creating a structural drag on the CAD.

• Economic softness: Canada’s growth is modest, export headwinds persist and inflation remains sticky limiting the BoC’s flexibility to maintain or raise rates.
  

What to watch next

• Oil price movements: A sustained rebound in oil could support the CAD, but a slump or risk off event would quickly reverse that.

• BoC commentary and rate policy path: Any signal of deeper cuts or dovish bias would further weigh on the currency.

• Canadian economic data: Key prints on inflation, employment and exports will influence both policy expectations and FX flows.

• FX market sentiment & risk appetite: In times of safe-haven demand, the USD strengthens and commodity linked FX like CAD often weaken.
  

The Canadian dollar remains caught between two powerful forces, commodity dependency and monetary policy pressure. While higher oil prices can deliver short term relief, the broader weakness in the economy and the policy gap with the U.S. create a more persistent drag.

For anyone exposed to Canadian assets, global FX flows or commodity driven currencies, the loonie’s story is not just about commodities it’s about policy, structural headwinds and global sentiment.