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Canadian dollar slips against G10 peers as oil falls; but trade policy offers upside surprises.
The Canadian dollar came under renewed pressure this week, as a sharp drop in global oil prices offset recent gains against the U.S. dollar and raised fresh concerns about the currency’s outlook ahead of the Bank of Canada’s next policy meeting.
The loonie had strengthened over the past week, driving USD/CAD down toward 1.3600 after peaking at 1.3798 on June 23. Analysts at MUFG Bank Ltd. attribute the decline in USD/CAD primarily to a broader pullback in the greenback, following a de-escalation of geopolitical tensions in the Middle East after a ceasefire agreement between Israel and Iran.
However, despite those gains, the Canadian dollar has lagged behind most of its G10 peers, ranking as the third-worst performer since June 23, behind only the U.S. dollar and the Norwegian krone.
"The CAD and NOK have both been undermined by the sharp decline in the price of oil with Brent falling back below USD70/barrel," says MUFG in a note released Friday.
GBP/CAD has climbed from 1.8450 to 1.8750 this week, while EUR/CAD has risen from 1.5750 to 1.6000.
Above: CAD/GBP dragged lower by falling oil prices.
Oil prices have resumed their downward trend amid a well-supplied market, MUFG analysts said, citing the International Energy Agency’s (IEA) June 2025 Oil Market Outlook.
The IEA expects global oil demand to rise by just 720,000 barrels per day this year, well below projected supply growth of 1.8 million bpd.
The weakness in oil is also helping to curb inflation risks in Canada, potentially giving the Bank of Canada (BoC) more room to ease monetary policy.
The market is currently pricing in around 9 basis points of rate cuts ahead of the central bank’s July 30 meeting.
May’s consumer price index (CPI) data showed core inflation easing back to 3.0%, down from a recent uptick earlier this year. With the unemployment rate rising to a cyclical high of 7.0% in May, further labour market deterioration in next week’s employment report could bolster the case for more accommodative policy.
Above: File image of U.S. Commerce Secretary Howard Lutnick.
Meanwhile, trade policy headwinds could soon fade and deliver upside surprises for the currency: There was support for the U.S. Dollar and its northern neighbour after U.S. Commerce Secretary Howard Lutnick said agreements with 10 major trading partners were at hand.
The comments lower the odds of a tariff 'cliff edge' on July 09, when a deadline for countries to negotiate more favourable trade deals with the U.S. expires.
"We're going to do top 10 deals, put them in the right category, and then these other countries will fit behind," said Lutnick.MUFG noted that while a successful trade agreement could boost confidence and growth prospects, it might also reduce inflation risks, giving the BoC more latitude to support the economy through lower rates.
"Overall, it suggests that risks are more tilted to the upside for Canada’s economy and the CAD from ongoing trade negotiations as it more likely tariffs will be lowered rather than raised further," says MUFG.