The Canadian dollar is navigating conflicting currents this week, as the euro advanced on the loonie while Scotiabank analysts argued that the currency’s decline against the U.S. dollar should remain contained. The mixed signals highlight the tug-of-war between falling oil prices, evolving risk appetite, and supportive domestic fundamentals.
Euro rallies on oil weakness and risk appetite
On Wednesday, the EUR/CAD pair climbed to a fresh intraday high, driven by a drop in crude oil and a broader shift toward risk-on sentiment in global markets. West Texas Intermediate crude slipped below $78 per barrel, weighed by demand concerns from China and expectations of higher OPEC+ supply. As a major oil exporter, Canada sees its currency weaken when energy revenues fall, reducing the inflow of U.S. dollars and eroding the loonie’s fundamental support.
At the same time, a brighter mood in equity markets fueled demand for higher-yielding currencies like the euro. European stocks posted solid gains and bond yields edged higher as traders bet that central banks, including the ECB, may be near the end of their tightening cycles. Better-than-expected German industrial production data also lent the euro a helping hand, offsetting lingering manufacturing worries.
Scotiabank sees limited USD/CAD losses
In contrast to the euro’s strength, Scotiabank’s foreign exchange team published a note suggesting the Canadian dollar’s losses against the U.S. dollar are likely capped. The bank pointed to several stabilizing factors: elevated commodity prices (especially oil) continue to support export revenues; the Bank of Canada’s policy stance has not diverged dramatically from the Federal Reserve, keeping the interest rate differential in check; and speculative short positions against the loonie are already stretched, limiting room for further bearish bets.
The USD/CAD pair has oscillated in a 1.34–1.36 range in recent weeks, and Scotiabank sees a break above 1.36 as requiring a significant external catalyst—such as a sharp oil-price slump or a surprisingly hawkish Fed. The bank advises traders and businesses to monitor key resistance levels and upcoming Canadian GDP and oil inventory data, but does not expect a dramatic CAD sell-off near term.
What it means for markets
The conflicting narratives underscore the complexity of loonie trading right now. While the EUR/CAD move reflects immediate commodity and sentiment pressures, the USD/CAD outlook paints a more resilient picture. For forex traders, the euro’s break above resistance may offer near-term upside if oil remains weak and risk appetite persists, but any reversal in crude prices or geopolitical shocks could quickly alter the trajectory. Meanwhile, businesses with currency exposure may not need to prepare for a sharp CAD depreciation, but should stay alert to oil prices and central bank signals.
