Canadian Dollar Hits Five-Month High as BoC Confidence

Key Takeaways:

*Canadian dollar hits five-month high vs. USD, pushing USD/CAD to 22-week lows.

*BoC signals confidence in economic resilience, supporting the loonie despite trade tensions.

*USMCA review in July 2026 poses potential medium-term risk; markets view near-term impact as limited.

Market Summary: 

The Canadian dollar has continued to extend its gains, climbing to its strongest level in five months against the US dollar. This strength has pushed USD/CAD to its lowest level in nearly 22 weeks, reflecting renewed confidence in Canada’s economic outlook and relative policy divergence versus the United States.

The loonie has been supported by the Bank of Canada’s (BoC) reaffirmation of a constructive economic outlook, with policymakers emphasizing the Canadian economy’s resilience despite ongoing trade-war rhetoric linked to the Trump administration. The BoC’s Monetary Policy Committee highlighted that growth, labor market conditions, and domestic demand have held up better than expected, even as global trade uncertainty remains elevated. Recent Canadian economic data have reinforced this narrative, consistently outperforming earlier pessimistic forecasts.

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USMCA vs NAFTA: A Canadian Perspective

From Canada’s standpoint, the United States–Mexico–Canada Agreement (USMCA) represents a more rules-based but restrictive framework compared to its predecessor, NAFTA.

Under NAFTA, Canada benefited from:

• Broad market access with fewer sector-specific constraints
• Stable, long-term trade certainty with limited political interference
• Strong integration of supply chains, particularly in autos and manufacturing
  

By contrast, USMCA, while preserving tariff-free access, introduced:

• Stricter rules of origin, especially in the auto sector, increasing compliance costs
• Sunset and review mechanisms, including the six-year review clause, which inject recurring uncertainty
• Greater scope for political leverage, particularly from the US side

From a Canadian perspective, USMCA is not structurally “better” than NAFTA, but it does provide clarity and continuity relative to the risk of outright trade disruption. Crucially, Canada has adapted well to the new framework, mitigating its downside through diversified trade links and stronger domestic fundamentals.

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Implications for the Canadian Dollar

The upcoming six-year USMCA review in July 2026 is emerging as a medium-term risk factor for the loonie. US President Donald Trump—now in his second term—has repeatedly expressed dissatisfaction with the very agreement he championed during his first presidency, raising concerns about renewed trade tensions under the banner of achieving a “fairer” deal.

However, markets are currently taking comfort in several factors:

• Canada’s economy has shown resilience despite trade uncertainty
• The BoC remains relatively confident compared to other major central banks
• Near-term trade risks appear contained, limiting downside pressure on CAD

As a result, USD/CAD weakness reflects not just US dollar softness, but also growing confidence in Canada’s ability to weather trade-related noise. Unless trade rhetoric escalates into concrete policy action, the Canadian dollar is likely to remain supported, with markets viewing USMCA-related risks as a 2026 issue rather than an immediate threat.

Technical Analysis

USD/CAD, H4: 

USD/CAD is trading lower after breaking below the key support level of 1.3735, signaling potential continuation of the bearish trend. The pair has retraced below the moving average line, indicating that sellers are currently in control. Market participants are closely watching for a further downside breakout, which could see the pair extend its losses toward the next support levels.

Technical Indicators:

• MACD shows increasing bearish momentum, confirming selling pressure.
  RSI stands at 30, below the midline, forming a death cross, which suggests the pair may continue to move lower.

If the bearish momentum persists, the short-term target could be 1.3570, with further downside risk toward 1.3425. Conversely, if the pair fails to maintain its losses, a technical rebound could occur toward the previous support-turned-resistance at 1.3735, followed by the next resistance near 1.3940.

Resistance Levels: 1.3735, 1.3940
Support Levels: 1.3570, 1.3425