USD/CAD tests 1.39 as oil's decline pressures Canadian dollar

The Canadian dollar weakened for a third consecutive session Tuesday, pushing USD/CAD toward 1.39 as declining crude prices reduced the value of Canada's oil exports, the country's largest single trade category.

"The oil-CAD correlation has reasserted itself with force this month, and there's no sign of a floor yet," said Adam Button, chief currency analyst at ForexLive. "Each incremental dollar decline in WTI pressures the loonie through both the trade channel and the fiscal outlook."

West Texas Intermediate crude averaged $92.79 a barrel in the second quarter, according to Tamarack Valley Energy's earnings report, while the Canadian dollar traded at an average of 1.38 per US dollar. The current move represents a break from that range, with oil prices declining and the currency weakening in tandem.

The divergence matters because Canada's oil and gas sector accounts for roughly 8 percent of GDP. A sustained decline in crude prices reduces corporate tax revenue, widens the current account deficit and gives the Bank of Canada more room to cut rates — a combination that historically has amplified CAD weakness. The central bank's next rate decision is Sept. 17, with money markets pricing a growing probability of a quarter-point reduction.

The move extends a trend that began in late June, when crude benchmarks broke below key technical levels after OPEC+ signaled a gradual unwinding of voluntary production cuts starting in October. Since then, the Canadian dollar has lost ground against all major Group-of-10 peers except the Norwegian krone, which faces similar oil-export headwinds. The loonie has declined 2.4 percent against the greenback over that period, making it the second-worst performing G-10 currency in July.

The Bank of Canada held its policy rate at 3.75 percent at its July 15 meeting, but Governor Tiff Macklem noted the economy had "more slack than previously estimated," language that markets interpreted as dovish. The Federal Reserve's target range stands at 4.50-4.75 percent, leaving a 100-basis-point spread that has historically supported the loonie but is now narrowing as rate-cut expectations diverge. Money markets assign a 68 percent probability to a BoC cut in September, up from 45 percent before the July decision.

The last time the Canadian dollar traded near these levels was in March, when USD/CAD briefly touched 1.3850 after the US imposed 10 percent tariffs on Canadian aluminum imports. That move reversed within three weeks as diplomatic talks progressed. This time, the catalyst is structural rather than political — a shift in global oil supply dynamics that could persist through year-end as OPEC+ adds barrels to the market.

For Canadian importers and consumers, the weaker currency carries direct costs. A declining loonie raises the price of imported goods, from industrial machinery to fresh produce, feeding into inflation measures that the Bank of Canada has worked to contain. The central bank's preferred core inflation gauge stood at 2.3 percent in May, above the 2 percent target, partly reflecting currency pass-through effects. BMO Capital Markets estimates that every one-cent decline in the Canadian dollar adds roughly C$1.5 billion to annual import costs.

This article is for informational purposes only and does not constitute investment advice.