USD/CAD Holds Near April 2025 Highs as Oil Slump and BoC-Fed Divergence Weigh on the Loonie

The Canadian Dollar continued to struggle on Tuesday, with USD/CAD trading around the 1.4165–1.4170 region during Asian hours — just a step below its highest level since April 2025. A triple headwind of depressed oil prices, a broadly firmer US dollar, and a widening monetary policy gap between the Bank of Canada and the Federal Reserve is keeping the Loonie on the back foot.

Oil Remains the Loonie's Achilles Heel

Canada's currency is acutely sensitive to crude prices, given that oil represents the country's largest export. West Texas Intermediate (WTI) remains pinned near its lowest level since March, with the US Treasury Department's decision to temporarily ease sanctions on Iranian crude exports adding fresh supply-side pressure. Progress in US-Iran peace talks — including a jointly confirmed 60-day roadmap toward a final deal brokered by Qatar and Pakistan — has further reinforced expectations of increased Iranian oil supply returning to global markets, mechanically capping any WTI recovery and by extension undermining CAD.

Inflation Data Fails to Shift the Needle for BoC

Monday's Canadian inflation print delivered a notable upside surprise. Statistics Canada reported that the annual inflation rate accelerated to 3.2% in May — a 29-month high — breaching the upper boundary of the Bank of Canada's 1%–3% target range. Under normal circumstances, such a reading would invite a hawkish policy response. Instead, BoC policymakers appear to be deliberately looking through the inflation overshoot, prioritizing support for a sluggish domestic economy over price stability concerns.

This stance stands in sharp contrast to the Federal Reserve, which signaled last week that policy rates could rise to 3.8% by year-end — implying at least one 25-basis-point hike ahead. Chicago Fed President Austan Goolsbee reinforced that message, warning that inflation is running well above the 2% target and moving in the wrong direction. The resulting BoC-Fed policy divergence creates a structurally bearish setup for CAD against USD, as rate differentials increasingly favor dollar-denominated assets.

Dollar's Safe-Haven Bid Adds Another Layer

Beyond rate differentials, the USD is drawing additional support from geopolitical uncertainty. Despite diplomatic progress, conflicting US-Iran signals — including Iran's foreign ministry denying new nuclear inspection commitments and Tehran asserting continued control over the Strait of Hormuz — are keeping safe-haven flows tilted toward the dollar. The US Dollar Index (DXY) remains anchored near a one-year high, adding a macro tailwind to USD/CAD's upside bias independent of CAD-specific dynamics.

Key Events to Watch

Two catalysts could generate short-term volatility in USD/CAD. BoC Governor Tiff Macklem is scheduled to speak during the North American session — any dovish signal or explicit acknowledgment that the BoC is tolerating above-target inflation would accelerate CAD weakness. Flash US PMI data, also due Tuesday, will provide a fresh read on US economic momentum. Longer term, Thursday's US PCE inflation print remains the week's primary macro event, with a hot reading likely to cement September Fed hike expectations and extend USD/CAD's upside trajectory.

Trader Takeaway: USD/CAD's path of least resistance remains higher. Bearish oil, BoC dovishness against a hawkish Fed, and dollar safe-haven demand form a structurally supportive backdrop. Watch Macklem's speech for near-term CAD direction and Thursday's PCE for broader USD momentum confirmation.

Sources: FXStreet, Statistics Canada, Bank of Canada, CME FedWatch Tool, US Treasury Department, Federal Reserve June 2025 Statement