USD/CAD Pullback Looks Limited as Softer Dollar Meets Weaker Oil Support

Quick Take

USD/CAD has room to pull back after the U.S. dollar lost momentum, but the Canadian dollar does not have a clean bullish setup either. The dollar weakened after June U.S. payroll growth slowed sharply, with markets cutting the chance of a September Fed hike to about 45%. At the same time, oil prices slipped on 6 July as OPEC+ agreed to increase output targets and Strait of Hormuz exports continued to recover, reducing one of the Canadian dollar’s usual supports.

Why the Dollar Has Lost Some Support

The U.S. dollar’s short-term pressure comes from the labour market. Reuters reported that the dollar was heading for its biggest weekly drop in 12 weeks after weak U.S. jobs data cooled expectations for a near-term Fed rate hike. The dollar index was around 100.83 after the report, down 0.5% for the week.

For USD/CAD, this matters because the pair had been supported by Fed hike pricing and higher U.S. yields. When traders reduce expectations for further Fed tightening, USD/CAD loses part of its upside driver. That is why the pair can see short-term selling pressure after softer U.S. jobs data.

Why CAD Still Has Trouble Rallying

The Canadian dollar’s problem is that its own support is also not strong. A Reuters poll published on 3 July showed analysts now expect the Canadian dollar to strengthen less than previously forecast. The median forecast saw USD/CAD at 1.40 in three months, weaker than the prior forecast of 1.37, while the 12-month forecast moved to 1.36 from 1.34 previously.

The main reason is uncertainty around USMCA/CUSMA negotiations. Canada sends about 70% of its exports to the United States, including steel, aluminum, autos, and lumber, and several of these sectors have already been affected by U.S. tariffs. This makes the Canadian dollar vulnerable even when the U.S. dollar weakens broadly.

BoC Expectations Are Less Supportive for CAD

The Bank of Canada is not giving the Canadian dollar a strong rate-support story. The BoC held its overnight rate at 2.25% on 10 June, with the Bank Rate at 2.50% and the deposit rate at 2.20%. It also said Canadian GDP edged down 0.1% in the first quarter, housing activity declined, business investment stayed weak, and unemployment was 6.6% in May.

This explains why rate expectations for Canada have cooled. Reuters reported that swap markets were pricing only about 10 basis points of BoC tightening this year, down from around 60 basis points in May. A weaker BoC pricing profile makes it harder for CAD to rally strongly against the dollar.

Oil Is No Longer Giving CAD Strong Support

Oil is another key issue. Canada is a major energy exporter, so higher crude prices usually help the Canadian dollar. But the latest oil move is not supportive for CAD. Reuters reported on 6 July that Brent crude slipped to around $71.88 a barrel and WTI traded near $68.58 after OPEC+ agreed to raise output targets by 188,000 barrels per day from August.

The recovery of Gulf exports also matters. Reuters reported that OPEC output rose sharply in June and Gulf oil exports jumped by more than 3 million barrels per day from May, although volumes remained below pre-war levels. More supply and recovering shipping through Hormuz reduce the oil-risk premium, which weakens one of CAD’s normal advantages.

Why the Pair Is More Likely to Stay Choppy

USD/CAD is being pulled in two directions. Softer U.S. jobs data weakens the dollar and can pressure the pair lower. But lower oil prices, weak Canadian growth, USMCA uncertainty, and reduced BoC hike expectations limit CAD strength.

That means the current setup is not a clean USD/CAD bearish reversal. It is more likely a high-level pullback inside a broader range unless oil prices recover strongly or U.S. rate expectations fall further.

Near-Term View

My near-term view is that USD/CAD may ease if the dollar remains under pressure after the U.S. jobs report. However, the downside may be limited while oil stays weak and Canadian rate expectations remain soft.

A cleaner USD/CAD decline would likely need lower Fed hike pricing, stronger Canadian data, and a rebound in oil prices. A renewed push higher could happen if U.S. data stabilises, oil keeps falling, or USMCA uncertainty continues to weigh on Canadian growth expectations.

Conclusion

The main point is simple: USD/CAD can pull back, but CAD does not have a strong enough story for a clean reversal. Weak U.S. jobs data has reduced dollar momentum, but lower oil prices, weaker BoC rate expectations, and Canadian trade uncertainty are keeping USD/CAD supported.