06.05.202616:21 Forex Analysis & Reviews: Canadian dollar still holds upper hand

Canada's manufacturing business activity index jumped sharply in April to 53.3, reaching its highest level since the COVID pandemic. Output rose, and new orders grew markedly — largely a market reaction to the war in the Middle East. Canada's oil sector is operating at full tilt as many buyers seek to rebuild inventories amid growing fears that the escalation will persist, and energy prices will climb further.

While consumer demand in Canada, as in many other countries, is being hit by rising gasoline prices and expectations of higher inflation and weaker real spending, the export-oriented industry is trying to squeeze the most out of the current situation. The trade balance moved into surplus in March largely for these reasons: imports fell versus February, while exports rose. That dynamic has helped support the Canadian dollar via a correction in international capital flows. The share of Canadian exports to the US has gradually declined — 76% in 2024, 72% in 2025, and 67% in March this year.

The Bank of Canada last week kept the policy rate at 2.25% as expected. The central bank maintained a fairly hawkish tone; market pricing implies a 50% chance of a rate hike in June and about 75 basis points of tightening priced in by year-end. That is a fairly bullish outlook for the loonie, given that the market's view on the Fed's rate path remains neutral.

The GDP outlook was also revised up to 1.2% y/y this year and 1.6% next year. Inflation was nudged slightly higher from 2.0% to 2.3% y/y. That forecast looks somewhat bold given that rising oil and gas prices will inevitably push costs up across sectors — even before accounting for a possible food crisis triggered by fertilizer shortages, which depend on natural gas.

The loonie's strength appears justified, but one caveat is clear: each day of escalation increases the odds the US will slip into recession, which for Canada would mean a sharp drop in exports. The best scenario for Canada is high oil prices combined with a resumption of global logistics — in other words, a peace deal between the US and Iran on Iran's terms, not the US's. In that case, Canada's economy could sustain its upward momentum, and the CAD would keep its bullish trend.

Net speculative positioning on the CAD was reduced by a sizable CAD 1.49 billion, to a net short of CAD 2.81 billion, though the model-implied price remains above the long?term average.

USD/CAD continues to trade in a sideways range — the Bank of Canada meeting left little immediate impression, and President Trump's suspension of the military operation "Project Freedom" was taken by most market participants as confirmation of a clearly weak US position. That led to a sharp dollar weakening and reduced the likelihood of renewed USD/CAD upside. Nevertheless, there are still no solid grounds for a sustained further decline in the currency pair, so we expect range trading with a lower bound around 1.3525–1.3545; in the event of a likely new escalation, a move up to the 1.3710–1.3750 area is possible.