05.06.202600:32 Forex Analysis & Reviews: USD/CAD. Why is the Loonie Losing Value?

The USD/CAD pair tested the 39th figure today for the first time since April 2024. Although buyers were unable to establish themselves in this price area, the pair still exhibits a clearly defined upward trend.

Looking at the weekly chart of USD/CAD, the pair actively declined throughout April, amid a general weakening of the US dollar. However, in early May, buyers took the initiative. In just five weeks, the price increased by nearly 400 pips—from 1.3549 (April low) to 1.3924 (current June high).

It should be noted that the upward dynamics of USD/CAD were influenced not only by geopolitical factors but also by developments concerning the "Iran case" (which we will discuss below), despite the pair remaining very sensitive to such developments. However, the weakness of the loonie is also explained by other interconnected fundamental factors.

Firstly, in May, the prospects for the Canadian economy worsened. At the end of last month, it was reported that Canada's economy unexpectedly contracted by 0.1% in the first quarter, following a 1.0% decline in the previous quarter. This means the country has formally entered a technical recession, leading to more dovish expectations for the Bank of Canada's future actions. Additionally, at the end of May, data on corporate profits were published. In the first quarter, this figure decreased by 2.0% quarter-over-quarter, reflecting a deterioration in business financial results amid slowing economic activity. The pressures on this indicator stemmed from declining consumer demand, high interest rates, and rising costs for companies. Weak profit dynamics are another sign of a slowdown in the Canadian economy.

Secondly, expectations of a Bank of Canada rate hike have diminished, driven not only by weak GDP data but also by inflation data. The key core inflation indicator unexpectedly dropped to a five-year low of 2.1% year-on-year. This indicates that high fuel prices have not "translated" into core goods and services. Moreover, the services sector has even slowed its growth (to 1.7%), and food inflation decreased to 3.5%. For the Bank of Canada, this dynamic in Core CPI serves as a compelling signal to maintain the status quo or even resume rate cuts. This means that the yield differential is shifting once again in favor of the US dollar.

The third supporting factor for USD/CAD is the ongoing uncertainty surrounding trade relations with the US. The risks posed by new tariffs and the upcoming revision of trade agreements are putting pressure on Canada's investment climate and, consequently, on the Canadian dollar.

First of all, this concerns the USMCA agreement (United States-Mexico-Canada Agreement). Under its terms, the parties are required to conduct a formal review of the agreement's operation every six years, with the first such "procedure" scheduled for July 1 of this year. Canada has officially notified the US and Mexico that it seeks to extend the deal for another 16 years without any preconditions. However, Washington, represented by Donald Trump, is demanding a review of several critical points of the USMCA affecting Canada. In particular, the White House insists on changing the rules for duty-free car imports: the US wants to require that at least 50% of car components be produced on American soil. This is a concerning signal for Canada's deeply integrated automotive industry. Additionally, Washington is again demanding that Ottawa eliminate the quota system and open the Canadian domestic market to American farmers.

If the parties do not reach an agreement and confirm the extension of the agreement by July 1, a formal collapse of the USMCA will not occur (as it remains legally effective until 2036), but political and trade uncertainty will increase, exerting background pressure on the Canadian currency.

Further (and quite significant) support for USD/CAD comes from the geopolitical agenda. The US dollar is in increased demand as a safe-haven asset. Even rising oil prices have not provided the usual support for the loonie. However, there is a downside: any signals of de-escalation (including unconfirmed rumors) automatically become a support factor for USD/CAD sellers. For example, on Thursday, the loonie reacted to insider information from Al Arabiya about negotiations to unlock part of Iran's frozen assets nearing the final stage. It was noted that Trump has been categorically opposed to any release of funds "until the final and official signing of a comprehensive agreement."

Against this backdrop of conflicting fundamental signals, the USD/CAD pair has been unable to consolidate above the resistance level of 1.3920 (the upper Bollinger Bands line on the H4 timeframe). Meanwhile, sellers have not managed to break through the intermediate support level of 1.3880 (the Tenkan-sen line on the same timeframe). The priority remains with long positions; however, it is advisable to open longs only after buyers confidently breach the price barrier of 1.3920. The next target for the upward movement is the level of 1.3970 (the upper Bollinger Bands line on the W1 timeframe).