Canadian Dollar: Downside risks versus USD with BoC on hold – Societe Generale

Societe Generale analysts note USD/CAD has broken key technical resistance and could extend higher as the Bank of Canada (BoC) is expected to keep rates unchanged at 2.25%. They highlight widening US-Canada yield spreads, a bullish outside day in USD/CAD, and weaker CAD correlations with Oil as factors pointing to potential CAD underperformance.

BoC pause and spreads support Dollar

"Elsewhere, we expect the BoC to keep its policy rate unchanged at 2.25%, the lower end of the neutral range. The economy sunk into technical recession following two successive quarters of contraction and core inflation eased to 2.1% in April. "

"Policymakers have previously signalled a reluctance to overinterpret the recent weakness in the economy. The impressive employment report last week gives Governor Macklem cover to maintain a neutral policy stance."

"Surveys point to no change in rates through 2026 which is a potential source of weakness for the CAD all else being equal (oil prices). The bullish outside day yesterday for USD/CAD could presage further weakness and an overshoot towards 1.40, backed by the marked widening in 2y UST/GCAN spread to around 125bp. "

"The 30-day correlation for the CAD with WTI crude has turned negative while its relationship with gold has strengthened, amplifying downside pressure."

"USD/CAD has broken above the descending trendline drawn from 2025 and is now challenging the upper boundary of its recent consolidation range. While a brief pullback cannot be ruled out, the recent pivot low around 1.3780 is likely to act as a short-term support. Defence of this may lead to persistence in the uptrend. Next objectives could be located at projection of 1.4030 and the November 2025 high near 1.4150."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)