Published on: 2025-08-01
Updated on: 2026-08-18
The Canadian dollar remains weak in 2026 because US interest rates still sit well above Canadian rates and trade uncertainty continues to weigh on CAD. Yet Canada’s employment, trade balance and oil backdrop have all improved. The loonie is now being held back more by US strength than by a fresh deterioration in Canada’s economy.
USD/CAD was 1.3865 on August 17, leaving the Canadian dollar near US$0.72 despite some recovery from weaker levels earlier in the summer.
The Bank of Canada rate is 2.25% versus 3.50%–3.75% at the Federal Reserve, leaving a 125–150 basis-point policy-rate advantage in favour of the US Dollar.
WTI crude is near $84 a barrel, yet higher oil has provided less support to CAD than the loonie’s traditional petrocurrency relationship would suggest.
Canada added 75,000 jobs in July, unemployment fell to 6.4%, and June trade produced a C$3.9 billion surplus, showing that domestic conditions have improved faster than the currency.
A sustained CAD recovery now depends more on a narrower US–Canada rate gap and lower trade uncertainty than on another rise in oil prices.
Interest rates remain the clearest structural drag on CAD. The Bank of Canada is holding its overnight rate at 2.25%, while the Federal Reserve’s target range remains 3.50%–3.75%. That leaves US short-term policy rates 125–150 basis points higher.
The gap keeps US Dollar assets relatively more attractive and raises the hurdle for a sustained CAD recovery. The Bank of Canada also noted in July that US bond yields had risen while Canadian yields were little changed, with the differential contributing to Canadian-dollar depreciation.
USD/CAD reflects two currencies, so a weaker loonie does not automatically mean Canada’s fundamentals are deteriorating. CAD can lose ground simply because demand for the US Dollar is stronger.
CIBC estimated in June that roughly 85% of CAD’s decline at that stage came from broader US Dollar strength, including safe-haven demand around geopolitical risk and firmer US data. That helps explain why the loonie has remained soft even as several Canadian indicators have improved.
CAD does not need bad Canadian news to weaken when the other side of the exchange rate is strong enough.
Canada remains a major energy exporter, but higher crude prices have not produced the CAD appreciation historically associated with stronger oil. WTI closed at $83.99 a barrel on August 14, yet the loonie remained near US$0.72.
Rate differentials and broader US Dollar demand have outweighed much of the support from energy prices. The oil-CAD relationship has not disappeared, but crude cannot offset a wide US–Canada rate gap and strong US Dollar demand on its own.
Canada added 75,000 jobs in July, while unemployment fell to a two-year low of 6.4%. Real GDP also increased 0.3% in May, and Statistics Canada’s advance estimate pointed to another 0.2% increase in June.
Those figures weaken the argument that CAD is falling because Canada’s economy is deteriorating. The recovery has instead been too modest to overcome the US Dollar’s relative rate advantage and materially reprice USD/CAD.
Canada’s merchandise trade balance returned to a C$3.9 billion surplus in June, but uncertainty over access to the US market remains a direct risk to growth and the currency.
As of August 18, Canada and the United States were still negotiating ahead of threatened 50% tariffs on roughly $20 billion of Canadian goods, scheduled to take effect on August 19 if no agreement is reached. Nearly 72% of Canadian goods exports went to the United States last year, making changes in US market access unusually important for Canadian exporters and business investment.
Tariff uncertainty can delay spending before new duties are imposed. A more stable trade relationship would remove one of the clearest Canadian-specific obstacles to a stronger loonie.
CAD appears unusually weak relative to several of its traditional market drivers. A model developed by currency strategist Robin Brooks using the Canada-US two-year interest-rate differential, Brent crude and the VIX places the Canadian dollar roughly two to three standard deviations weaker than its historical relationship with those variables would imply. The gap is unusually large within the model’s sample.
That does not mean CAD is definitively mispriced or that a rebound is imminent. Currency relationships can change as trade patterns, policy regimes and capital flows shift. The model instead reinforces the central puzzle of 2026: stronger oil and improving Canadian data have delivered far less support to CAD than historical relationships would have suggested.
CAD’s strongest recovery path would combine resilient Canadian growth with softer US rate expectations. That combination would narrow the rate disadvantage without requiring another surge in oil.
USD/CAD has already fallen from around 1.42 at the end of June to 1.3865 by August 17, recovering part of CAD’s earlier losses. A Reuters poll of 34 FX analysts put the median forecast at 1.40 in three months and 1.366 in twelve months, implying little near-term relief followed by moderate CAD appreciation rather than a sharp rebound.
Three scheduled releases will test whether the rate gap can finally start moving in CAD’s favour.
| Event | CAD-positive | CAD-negative |
|---|---|---|
| GDP, Aug. 28 | Growth stays firm | Growth loses momentum |
| BoC, Sept. 2 | Rates stay steady | Easing returns to view |
| Fed, Sept. 16 | US rate outlook softens | High rates persist |
Statistics Canada is scheduled to publish official June GDP and second-quarter estimates on August 28. The Bank of Canada’s next policy decision follows on September 2, while the Federal Reserve’s next meeting concludes on September 16.
Canadian data alone may not be enough to drive a large currency move if US rates remain elevated. The stronger CAD signal would be firm domestic growth followed by a softer Federal Reserve outlook, directly narrowing the rate disadvantage that has dominated USD/CAD in 2026.
Yes, although the label is less useful as a short-term forecasting rule. Canada remains a major energy exporter, so oil still influences trade income and CAD over time. In 2026, interest-rate spreads and broad US Dollar moves have repeatedly outweighed the currency’s traditional sensitivity to crude prices.
Yes. A wider US–Canada rate gap, renewed US Dollar strength or a significant trade shock could push CAD below US$0.70. A sustained break would probably require several bearish forces to align rather than one weak Canadian data release.
Both effects are possible. A weaker CAD makes imported goods more expensive and can add inflation pressure, while also improving the price competitiveness of Canadian exports. The Bank of Canada has specifically noted that CAD depreciation raises import costs while improving export competitiveness.
USD/CAD shows how many Canadian dollars are required to buy one US Dollar. A move from 1.38 to 1.42 therefore means the US Dollar has strengthened relative to CAD. A decline in USD/CAD means the opposite: fewer Canadian dollars are needed to buy one US Dollar, so CAD has strengthened.
Canada’s August 28 GDP release is the first test of whether domestic growth can support firmer rate expectations heading into September. The loonie needs a smaller US–Canada rate gap more than it needs another rise in oil.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
