Canadian Dollar Faces Near-Term Volatility, but Uptrend Remains Supported
2min read The Canadian dollar (CAD) has shown resilience in early May 2025 despite short-term weakness, driven by a mix of trade uncertainties and fluctuating commodity prices. While the CAD dipped to a low of 1.374 USD/CAD at the start of the month, analysts project an end-of-May rate of 1.404 USD/CAD, reflecting an underlying 2.2% monthly appreciation. This upward trajectory is underpinned by structural factors, including commodity price stability, cautious monetary policy, and the potential resolution of trade disputes.
The Near-Term Weakness: Trade and Commodity Pressures
The CAD’s recent volatility stems from two primary headwinds:
1. Trade Policy Uncertainty: Ongoing U.S. tariff threats on Canadian exports—particularly in energy, lumber, and agriculture—have dampened investor sentiment. For instance, U.S. tariffs on Canadian oil could push Brent crude prices down to $60/barrel, weakening the CAD’s commodity-linked support.
2. Interest Rate Differentials: The Bank of Canada (BoC) has maintained its overnight rate at 2.75% since April, while the U.S. Federal Reserve (Fed) has hinted at further hikes. This divergence creates a negative interest rate gap, making the USD more attractive to yield-seeking investors.
Why the Uptrend Persists: Key Supportive Factors
Despite these challenges, several factors suggest the CAD’s long-term trajectory remains upward:
1. Commodity Price Stability:
- Metals and Gold: U.S. tariff fears have driven a surge in metals demand, with copper prices rising by 12% year-to-date, while gold’s safe-haven appeal has bolstered it to $2,100/oz—a 7% increase since January.
- Oil’s Mixed Picture: While Brent crude fell to $65/barrel in April, Canadian oil sands production cuts and OPEC+ output discipline have narrowed the WTI-Western Canadian Select spread to $10/barrel, reducing regional pricing pressures.
Trade Policy Resolution Hopes:
The U.S. and Canada are inching closer to a temporary tariff truce, with negotiations focusing on automotive and energy sectors. A phased removal of tariffs could boost Canadian exports by 3–5%, directly strengthening CAD demand.BoC’s Cautionary Stance:
The BoC has signaled it will avoid aggressive easing, even as inflation edges toward its 2% target. Analysts at Desjardins and BMO project terminal rates of 2.25%–2.5% by year-end—higher than some pessimistic forecasts—which limits downward pressure on the CAD.
Technical Analysis: An Ascending Triangle Points to a Breakout
Technical traders note the CAD/USD pair has formed an ascending triangle pattern since January 2025, with support at 1.35 and resistance near 1.42. A sustained breakout above 1.42—as projected by WalletInvestor—would validate the uptrend, potentially pushing the pair toward 1.45 by late 2025.
Risks to the Uptrend
- Global Recession Fears: A U.S. slowdown or Eurozone contraction could slash oil demand, pushing Brent below $60/barrel and weakening the CAD.
- Fed Aggression: If the Fed hikes rates beyond 3.5%, the USD could strengthen further, countering CAD gains.
Conclusion: CAD’s Uptrend Holds, but Stay Vigilant
The CAD’s near-term volatility is real, but the currency’s fundamental pillars—commodity linkages, trade normalization hopes, and BoC discipline—are intact. With the CAD projected to close May at 1.404 USD/CAD and technical indicators pointing upward, investors should view dips as buying opportunities. However, risks remain: a global recession or prolonged U.S.-China trade war could derail this trajectory. For now, the CAD’s story is one of cautious optimism, backed by data showing a +1.8% GDP growth forecast for 2025 and inflation steadily near target.
In summary, the CAD’s uptrend is far from over, but investors must stay attuned to geopolitical shifts and central bank actions. As the old Wall Street adage goes: “Don’t fight the tape—and the CAD tape is pointing north.”
