USD/CAD Breaches 1.3900 as Loonie Succumbs to Oil Collapse and King Dollar

The USD/CAD pair surged past the critical 1.3900 handle on Thursday, driven by a perfect storm of negative factors for the Canadian Dollar (Loonie). The currency pair rose 0.10% on the day, reflecting a sharp divergence between the US and Canadian economic outlooks.

Terms of Trade Shock

Canada, a major G7 energy exporter, saw its terms of trade deteriorate rapidly as WTI Crude Oil collapsed below $60 per barrel. The +4% drop in oil prices removes a key pillar of support for the CAD, leaving it vulnerable to broader currency flows.

The Fed vs. BoC Divergence

While the Loonie struggled with commodity weakness, the US Dollar (USD) found fresh demand following hawkish comments from KC Fed President Jeffrey Schmid and solid US macroeconomic data.

• US Side: Resilience in the US economy and “sticky” inflation data are forcing markets to price out aggressive Fed rate cuts.
• Canada Side: With the energy sector under pressure and domestic growth tepid, the Bank of Canada faces less pressure to maintain restrictive rates compared to its southern neighbor.

Technicals

• A break above 1.3900 opens the door for further upside on the pair.
• Correlation between USD/CAD and the collapsing oil market reasserts itself.
• Path of least resistance remains upward unless oil prices stage a rapid recovery.