CAD Outlook: Loonie Holds Ground Despite Oil Price Surge and Weak USD

Canadian Dollar Shows Resilience Amid Geopolitical Tensions

The Canadian Dollar (CAD) continues to exhibit a stable undertone against its major peers despite heightened geopolitical tensions in the Middle East and volatile crude oil prices. According to Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret, CAD’s performance has been middle-of-the-pack since the Israel-Iran conflict escalated.

Disconnect Between Oil Prices and CAD Strength

While crude oil prices have surged, particularly WTI, the CAD has not responded in kind. Analysts note a weakening correlation between CAD and oil:

1-month rolling correlation: –17%
10-day rolling correlation: –38%

This highlights how CAD's sensitivity to oil has diminished, possibly due to changing market structures, global diversification of energy exports, or investor focus on broader macroeconomic themes.

Catalysts for CAD Movement: Not Oil, but USD and Trade

The recent CAD strength is largely driven by broad US Dollar softness, not by domestic fundamentals or commodity price shifts. However, a significant disruption in Iranian supply or closure of the Strait of Hormuz could provide a more lasting boost to oil—and potentially to the CAD.

Looking ahead, the G7 summit in Canada could bring important developments on US-Canada trade negotiations, which may serve as a catalyst for CAD if positive resolutions are announced.

Current Market Pricing and Outlook

Spot CAD is trading close to Scotiabank’s fair value estimate of 1.3588, suggesting limited near-term upside without a new catalyst. With the market focus shifting from crude to trade diplomacy and central bank policy, CAD traders are advised to watch headlines from the G7.