Canadian Dollar struggles as falling Crude prices weigh on sentiment

The Canadian dollar remains on the defensive as the market continues to trade the same three forces that have defined the pair in recent sessions: Middle East risk, crude oil volatility, and a widening policy-rate advantage for the US. WTI has been trading in the low 90s after sharp swings tied to renewed US-Iran tensions, while USD/CAD is hovering around 1.38, leaving the loonie vulnerable when risk sentiment turns quickly.

That backdrop is not helping Canada’s rate story. The BoC kept its policy rate at 2.25% in its April decision, and the short-end yield gap still favors the US: the 2-year Treasury yield is around 4.06% versus roughly 2.85% for the Canada 2-year, a spread of about 1.21 percentage points. In practice, that keeps the dollar supported against the loonie even when the greenback loses some safe-haven appeal.

Oil remains the key external swing factor for Canada. The latest market move is still being driven by the possibility of de-escalation in the Middle East, but any relief in risk assets is fragile because crude is reacting to every headline. That matters for Canada because weaker energy prices tend to drag on export revenues, terms of trade, and ultimately the currency itself.

The next two data points should matter most for the pair. The BEA’s Personal Income and Outlays report, which includes the US PCE inflation release, is due on 28 May, while Statistics Canada’s official Q1 GDP estimate arrives on 29 May; StatCan’s advance reading already pointed to 0.4% growth in 1Q, but the official release will be the market’s real reference point.

“USDCAD remains supported by both the US yield advantage and the risk of further crude weakness. With the Bank of Canada holding at 2.25% and key US inflation data due on 28 May, traders are likely to stay defensive on the loonie until the next catalyst confirms whether the current move is a pause or the start of a broader reset,” says Wael Makarem, Financial Markets Strategist Lead at Exness.

For now, the loonie is still trading as a commodity currency with a weak domestic rate tailwind. If oil stabilizes and Canada’s GDP print comes in stronger than expected, the pair could lose some momentum; if PCE surprises hotter or crude sells off on easing geopolitical tensions, USD/CAD is likely to stay well supported.