USD/CAD Stays Mixed as Oil Drop Weakens CAD but Dollar Also Softens

Quick Take

USD/CAD is stuck in a mixed setup. The Canadian dollar is losing part of its oil-linked support after crude prices fell sharply on signs of a possible deal to reopen the Strait of Hormuz. At the same time, the U.S. dollar is also softer as safe-haven demand eases, which prevents USD/CAD from turning into a clean upside move. Brent fell 5.4% to $97.91, while WTI dropped 5.7% to $91.10 on 25 May as deal hopes improved risk appetite.

Why Lower Oil Is a Problem for CAD

The Canadian dollar usually benefits when oil prices are strong because Canada is a major energy exporter. When crude falls sharply, that support weakens.

This is why the latest oil move matters for USD/CAD. A drop below the recent $100 area reduces the commodity tailwind for CAD and makes it harder for the loonie to strengthen purely on energy flows.

But the move is not completely bearish for CAD. Lower oil also helps reduce global inflation stress and improves broader risk appetite. That is why USD/CAD is not simply surging higher even though oil has fallen.

Canada Inflation Is Higher, but the Details Are Less Hawkish

Canada’s April CPI rose 2.8% year on year, up from 2.4% in March, mainly because gasoline prices jumped after the Iran war pushed global crude prices higher. Gasoline prices rose 28.6% in April, and transportation costs increased 7.6%, the fastest rise since November 2022.

At first glance, that should support CAD through higher Bank of Canada rate expectations. But the details were less hawkish than the headline. The CPI reading came in below the 3.1% expected by analysts, while the core measures watched by the Bank of Canada softened, with CPI-median falling to 2.1% and CPI-trim to 2.0%.

Why BoC Expectations Are Still Contained

The softer core inflation picture makes it harder for markets to price a more aggressive Bank of Canada response. After the CPI report, the Canadian dollar touched a nearly five-week low and market pricing for Canadian rate increases fell from 54 basis points to 50 basis points for the year.

That means CAD does not get a clean boost from inflation. Headline CPI is higher, but the parts of inflation that matter more for policy are not forcing the BoC into a clearly hawkish position.

The Bank of Canada’s April outlook also suggests caution. Its base case expected inflation to peak around 3% in April because of fuel prices, then slow toward 2.5% in June and return to the 2% target in early 2027 if oil prices decline as assumed.

Why the Dollar Is Not Running Away

The U.S. dollar still has rate support from the Fed, but today’s market tone is not fully dollar-positive. Reuters reported that the dollar index fell to its lowest level since 18 May as signs of a possible Hormuz reopening deal improved risk appetite and reduced safe-haven demand.

This is why USD/CAD is not a simple bullish dollar trade. Oil weakness hurts CAD, but dollar softness offsets part of that pressure.

In other words, both sides of the pair are under pressure for different reasons. CAD is losing commodity support, while USD is losing some safe-haven support.

Near-Term View

My near-term view is that USD/CAD may stay rangebound unless one side of the story becomes clearer.

If oil continues falling and Canadian data stays soft, USD/CAD could remain supported. But if the dollar keeps losing safe-haven demand and risk appetite improves, the pair may struggle to break sharply higher.

A cleaner upside move would likely need weaker CAD data, lower oil, and renewed U.S. dollar strength at the same time. Without that combination, USD/CAD may continue to move sideways with short bursts in both directions.

Conclusion

The main point is simple: USD/CAD has support, but not a clean breakout setup. Lower oil weakens the Canadian dollar, while softer core inflation limits BoC rate-hike expectations. But the U.S. dollar is also losing safe-haven support as Hormuz reopening hopes improve, leaving the pair in a choppy range rather than a clear trend.