CAD's Momentum: Is the Canadian Dollar Poised for a Sustained Upswing Amid Fading Retail Concerns?

The Canadian dollar (CAD) has long been a barometer of global trade dynamics and commodity cycles, but its recent trajectory in 2025 reflects a more nuanced interplay of macroeconomic catalysts and speculative positioning. As investors weigh the potential for a sustained CAD upswing, the question of whether fading retail concerns are a genuine tailwind—or merely a temporary reprieve—demands a granular analysis of short-term fundamentals and market sentiment.

Retail Sector Dynamics: A Mixed Recovery

Canada's retail sales data for Q2 2025 paints a contradictory picture. While the annualized growth rate hit 2.0% in June, July saw a 0.8% monthly decline, attributed to broad subsector weaknessCanada Retail Sales - Marcus Millichap^[2]. However, August rebounded with a 1% gain, offering a tentative sign of stabilizationCanada Balance of Trade - Trading Economics^[3]. This volatility underscores the fragility of consumer confidence, which dipped in August after four consecutive months of improvementIndex of Consumer Confidence for August 2025 - Conference Board of Canada^[5]. The Conference Board of Canada notes that households increasingly anticipate deteriorating economic conditions, partly due to the Bank of Canada's decision to hold its key rate at 2.75%Index of Consumer Confidence for August 2025 - Conference Board of Canada^[5].

Retailers, meanwhile, report that 80% of businesses saw year-over-year sales gains, driven by “economic patriotism” and strategic promotionsTD Economics - Latest Forecast Tables^[1]. Yet this optimism is tempered by persistent headwinds: supply chain disruptions, tariff shifts, and election-related uncertainty. The sector's modest growth suggests that while retail concerns may be easing, they remain a drag on broader consumer spending.

Employment and Trade: Headwinds to CAD Strength

The labor market delivered a stark reminder of Canada's macroeconomic challenges in August 2025. The country lost 66,000 jobs, pushing the unemployment rate to 7.1%, a nine-year high outside the pandemic eraTD Economics - Latest Forecast Tables^[1]. Key industries like professional services, transportation, and manufacturing contracted sharply, with Ontario, British Columbia, and Alberta bearing the brunt of the declineTD Economics - Latest Forecast Tables^[1]. This labor market softness, coupled with a July trade deficit of C$4.9 billion (narrowing from June's C$6.0 billion but still above expectationsCanada Balance of Trade - Trading Economics^[3]), creates a drag on CAD fundamentals.

The trade deficit, though improved from April's record low of -C$7.6 billion, remains a vulnerability for the Canadian dollar. As a commodity-export-dependent economy, Canada's trade balance is highly sensitive to U.S. demand and global energy prices. The recent uptick in industrial machinery imports further highlights structural imbalancesCanada Balance of Trade - Trading Economics^[3].

Speculative Positioning: A Contrarian Signal?

The Commitments of Traders (COT) report for CAD/USD reveals a critical shift in speculative positioning. As of September 16, 2025, large speculators (Non-Commercial traders) held a net short position of -107,177 contracts, indicating bearish sentimentCanada Balance of Trade - Trading Economics^[3]. Small traders also maintained a modest net short, while commercial hedgers reduced their longs slightlyCanada Balance of Trade - Trading Economics^[3]. This positioning aligns with the OANDA position ratio, which shows 78.53% of USD/CAD positions are long—a historically extreme level that often precedes reversalsCAD Outlook: Trade Turbulence Offers Contrarian Opportunity - BMOFundCentral^[4].

Historically, such extremes in speculative positioning have acted as contrarian indicators. For instance, non-commercial investors' record net short positions in CAD often precede currency turnaroundsCAD Outlook: Trade Turbulence Offers Contrarian Opportunity - BMOFundCentral^[4]. Additionally, clusters of buy orders near 1.3660 and sell orders near 1.3865 suggest potential support and resistance levels for USD/CADCAD Outlook: Trade Turbulence Offers Contrarian Opportunity - BMOFundCentral^[4]. If the CAD breaks above 1.3865, it could trigger a wave of short-covering and momentum-driven buying.

Broader Outlook: Undervaluation and Policy Divergence

Despite near-term headwinds, the Canadian dollar remains undervalued relative to the U.S. dollar. Valuation indicators, such as purchasing power parity and trade-weighted exchange rates, suggest a gradual appreciation is warranted as the U.S.-Canada interest rate differential narrowsCAD Outlook: Trade Turbulence Offers Contrarian Opportunity - BMOFundCentral^[4]. TD Economics forecasts CAD to appreciate from 1.44 in early 2025 to 1.33 by year-end, driven by a dovish Bank of Canada and a resilient U.S. dollarTD Economics - Latest Forecast Tables^[1].

However, risks persist. A hawkish pivot by the Federal Reserve or the imposition of Trump-era tariffs could reinforce USD strength, countering CAD's fundamental appeal. Conversely, a resolution to trade tensions and a narrowing of interest rate differentials could catalyze a sustained CAD upswing.

Conclusion: A Delicate Balance

The Canadian dollar's momentum in 2025 hinges on a delicate balance between fading retail concerns and persistent macroeconomic headwinds. While the retail sector's partial recovery and speculative positioning extremes hint at potential for a short-term rebound, the labor market's deterioration and trade deficits cannot be ignored. Investors should monitor the Bank of Canada's policy trajectory, U.S. Federal Reserve decisions, and trade developments for clarity on CAD's path. For now, the currency appears poised for a volatile but potentially corrective upswing—if speculative bets reverse and macroeconomic data stabilizes.