Image © Adobe Images
With more USD weakness expected, the CAD looks poised to fall further.
The Canadian Dollar looks set to be dragged lower by the decline in the U.S. Dollar.
Losses for CAD and USD at the start of a new week confirm a correlation seen through much of 2025 is still in place between the two North American currencies: the 'sell America' theme has caught the CAD in its net.
The two North American currencies are trending lower as investors see a shift away from American exceptionalism, driven by policy uncertainty, tariffs and burgeoning debt.
With tariff fears receding, it is the ballooning U.S. debt pile that has captured the market's attention as the Republican Party pushes through a multi-year spending bill through Congress, and Moody's downgrades its credit rating on U.S. debt.
The developments weakened the U.S. Dollar, as well as the Canadian Dollar, which lost value against its global peers in response.
In fact, a look at the CAD/GBP exchange rate, with the Dollar index alongside, confirms a correlation that suggests further CAD weakness is to be expected if the USD falls further.
"Despite a somewhat brighter US outlook, we still expect the Dollar to weaken," says a note from Goldman Sachs.
"We see another 5% move lower in the USD in H2," says Mark McCormick, Head of FX and EM Strategy at Canada's TD Bank.
The Canadian economy is closely aligned and integrated with the U.S. economy, meaning any slowdown in the U.S. will weigh on Canada.
Although the worst of the tariff phase has passed, economists agree that the impact of higher import prices will be felt in the coming weeks and months.
"While we have modestly lowered our tariff rate assumptions with a commensurate decline in recession risks, they are still settling in a much more protectionist area than our assumptions from a few months ago," says Goldman Sachs.
In addition, Canada's unemployment rate is far higher than that of the U.S., and inflation is more subdued, meaning the Bank of Canada has more leeway to cut interest rates in response to a slowdown.
This idiosyncratic weakness, combined with a USD proxy status, bodes for further CAD weakness.