Canadian Dollar: Fragile Recovery Tied to the US – Commerzbank

Commerzbank FX analyst Michael Pfister believes that the recent weakness of the Canadian dollar contrasts with the fragile recovery of Canada's real economy. Labor market data, GDP surprises, and stronger PMI readings all point to improving economic conditions, but the loonie's trajectory remains primarily driven by oil prices and Canada's less attractive interest rate expectations relative to the US.

**Economic Improvement Has Yet to Translate into Exchange Rate Support**

Recent Canadian data has shown signs of a rebound, including better-than-expected labor market, GDP, and PMI figures. However, this improvement has not been reflected in the Canadian dollar's exchange rate. The analyst notes that the loonie still lacks independent support from the interest rate side, with its appeal falling short of US rate prospects, making the currency less sensitive to positive economic news.

**Oil Prices and US Policy Remain Key Variables**

The Canadian dollar's trajectory continues to largely track oil price fluctuations while also being influenced by policy uncertainty from the US side. Commerzbank's forecasts indicate that EUR/CAD will trade around 1.60–1.62, while USD/CAD is expected to retreat to near 1.35 by the end of 2027. The bank holds a cautiously optimistic view on the loonie's medium-term recovery but emphasizes that the process could be lengthy and bumpy.

**Short-Term Direction Remains Range-Bound**

As of writing, EUR/USD is trading at 1.15715. Combined with Commerzbank's EUR/CAD range assessment, the Canadian dollar against the US dollar lacks a clear one-sided driver in the short term, exhibiting more range-bound oscillation characteristics. Market focus remains on oil price trends and marginal changes in the US-Canada interest rate expectation differential.