Canadian Dollar's Resilience Amid Trade Uncertainty: A Strategic Bet on CAD's Near-Term Strength

The Canadian dollar (CAD) has defied expectations in early 2025, maintaining its footing against the U.S. dollar despite ongoing trade tensions and economic headwinds. While the Bank of Canada (BoC) adopted a cautious stance on interest rates, recent jobs data and oil price dynamics have created a compelling case for a strategic long position in CAD. Let's dissect the factors underpinning its resilience and identify actionable opportunities.

The BoC's Caution: A Hidden Support for CAD

The BoC's decision to hold the overnight rate at 2.75% on June 4, 2025, underscored its reluctance to preemptively cut rates despite a weakening economy. While headline inflation dipped to 1.7% in April due to tax changes, core inflation inched up to 2.3%, signaling underlying price pressures. This mixed data kept the BoC in a “wait-and-see” mode, avoiding the aggressive easing markets had priced in.

The CAD's resilience is evident in the USD/CAD pair's dip to 1.3650—a level last seen in October 2024. Analysts at BofA Securities note this reflects market confidence in the BoC's ability to balance trade risks and inflation. While short-term forecasts suggest USD/CAD could rise to 1.38 by quarter-end, the 1.36 support remains a critical technical anchor. A break below this level would likely trigger further CAD gains, but the BoC's cautious tone ensures this remains a near-term floor.

Jobs Data: A Double-Edged Sword for CAD

Recent Canadian employment data reveal a nuanced picture. Unemployment rose to 6.9% in May 2025, with job losses concentrated in trade-exposed sectors like manufacturing. However, the labor market's softness may have been overestimated. Analysts at RBC Economics argue that the market had priced in a 15,000-job decline, but if the actual June report shows resilience—or even a modest gain—CAD could surge.

A stronger-than-expected jobs report would reinforce CAD's standing, especially if U.S. nonfarm payroll data disappoints. Conversely, persistent weakness could pressure CAD toward 1.38, but the BoC's focus on inflation over growth suggests the central bank will avoid aggressive easing unless core inflation trends reverse sharply.

Oil: CAD's Lifeline Amid Geopolitical Crosswinds

The CAD's fate remains tightly linked to oil prices, which stabilized near $62.50/barrel for WTI in early June 2025. Despite OPEC+'s July output increase and U.S. shale production cuts, geopolitical risks—including Middle East tensions and Canadian wildfires—are supporting prices.

A breakout above $63.50 could push CAD to test 1.35, while a drop below $60 would risk a retreat to 1.38. However, long-term forecasts suggest WTI could climb to $70 by year-end if supply constraints deepen. For CAD bulls, this creates a “best of both worlds” scenario: oil-driven gains in CAD paired with the BoC's reluctance to cut rates.

Trade Policy: The Wild Card in CAD's Outlook

The BoC's caution is partly a response to U.S. trade policy uncertainty. Prolonged tariffs on Canadian goods—particularly steel and aluminum—threaten export-driven sectors and could force the BoC into cuts. Yet, recent negotiations between Ottawa and Washington hint at a potential resolution. If tariffs are reduced, CAD could rally decisively through 1.35. However, a stalemate would keep CAD anchored near 1.36, with downside risks if inflation spikes due to cost pass-through.

Investment Strategy: Playing CAD's Near-Term Resilience

For investors, a strategic long position in CAD offers asymmetric rewards. Here's how to execute it:

1. Currency Futures or ETFs:
2. CAD Futures: Use contracts (e.g., CME's CAD/USD futures) to target gains if USD/CAD breaches 1.35. Set a stop-loss below 1.36 to limit risk.

3. ETFs: The CurrencyShares Canadian Dollar Trust (FXC) provides exposure to CAD's appreciation. A 10% allocation to FXC in a diversified portfolio can hedge against USD weakness while capitalizing on CAD's support.

4. Oil-Linked Plays:
   Pair CAD exposure with oil ETFs like USO (United States Oil Fund) to amplify gains if WTI breaks above $63.50. This dual strategy leverages CAD's oil sensitivity.

5. Wait for Catalysts:
   Monitor June's Canadian jobs report and U.S. nonfarm payrolls (NFP) on June 10. A stronger-than-expected Canadian print or weak NFP could trigger a CAD surge.

Risks to Consider

• Prolonged Tariffs: If U.S. trade policies deteriorate, CAD could fall to 1.38.
• Oil Oversupply: A WTI drop below $60 would pressure CAD.
• BoC Policy Shift: A surprise rate cut in July would weaken CAD, though current signals suggest this is unlikely unless inflation collapses.

Conclusion

The CAD's resilience at 1.36 is no accident—it's a product of the BoC's disciplined stance, oil's stabilizing influence, and trade policy hope. While risks linger, the near-term technical and fundamental backdrop favors a strategic long position. Investors who pair CAD exposure with oil plays and stay nimble on trade/negotiation news stand to profit handsomely as uncertainty eases. The path to 1.35—and beyond—is clear, but keep a watchful eye on the data.

CAD's dual dependency on oil and monetary policy creates both opportunities and pitfalls for traders.