The Canadian Dollar (CAD) continued to weaken against the US Dollar (USD) for a second consecutive day, with USD/CAD trading around 1.4230, up 0.20% on the day as of Monday. This decline occurred despite rising oil prices, which typically support the commodity-linked CAD, as investors favored the US Dollar amid expectations of further monetary tightening by the Federal Reserve. According to the CME FedWatch tool, there is a 76.9% probability of additional Fed interest rate hikes by year-end, and market participants are awaiting the release of the Fed's June meeting minutes for further policy guidance [1].
Shipping traffic through the Strait of Hormuz is gradually normalizing after recent disruptions, and OPEC+ has approved a 188,000-barrel-per-day production increase for the coming month, led by Saudi Arabia and Russia. While this move signals confidence in regional stability, it has also raised concerns about a potential global oil supply surplus [1].
On the economic data front, the US ISM Services PMI eased slightly to 54 in June from 54.5 previously, in line with market expectations. The survey indicated weaker new orders and softer prices paid, but an improved employment index, suggesting continued solid expansion in the US services sector [1].
Scotiabank analysts note that the Canadian Dollar retains a soft bias, even as short-term yield spreads between Canada and the US have narrowed. The confirmation of the non-renewal of the United States-Mexico-Canada Agreement (USMCA) has extended trade uncertainty for Canadian exporters, and the upcoming Bank of Canada Business Outlook Survey is expected to reflect this cautious environment. While the CAD remains fundamentally undervalued, Scotiabank believes this undervaluation has narrowed, limiting the currency's upside potential in the near term [1].
In terms of daily performance, the Canadian Dollar was the strongest against the Japanese Yen but showed weakness against the US Dollar, declining by 0.24% versus the USD [1].
CONCLUSION
Despite supportive oil prices and narrowing yield spreads, the Canadian Dollar remains under pressure due to a strong US Dollar and ongoing trade uncertainties. Market participants are closely watching upcoming Fed communications and the Bank of Canada’s Business Outlook Survey for further direction. The CAD’s upside appears limited in the near term, according to analysts.