Oil Rebounds Above $90: Why Is the Canadian Dollar Still Falling?

On Wednesday, USD/CAD held firm, trading around 1.40863, edging slightly higher intraday. Despite international oil prices rebounding above $90, the Canadian dollar, traditionally highly correlated with oil prices, failed to gain corresponding support, with the exchange rate remaining near recent highs.

**Oil-CAD Correlation Significantly Weakened**

Market observers widely note that oil price gains now provide far less support to the Canadian dollar than in the past. Jack Mintz, an economist at the University of Calgary, pointed out that oil prices used to typically drive the loonie higher, but the relationship has clearly weakened in recent years. The recent oil rebound has not benefited the Canadian dollar as it did in the early 2010s, tied to Canada's deteriorating export performance. Livio Di Matteo, an economics professor at Lakehead University, further explained that even with energy prices rising again, Canada's economy struggles to fully capitalize due to insufficient capacity and investment. The Bank of Canada also believes that markets generally view oil price gains as a short-term phenomenon, and combined with safe-haven demand driven by geopolitical tensions, the loonie's reaction to oil prices is far weaker than in the past.

**US Dollar Strength Dominates FX Market Direction**

The core reason for the Canadian dollar's weakness lies in the overall strength of the US dollar. Doug Porter, chief economist at BMO, stated that the dominant factor over the past two months has been the sharp appreciation of the US dollar itself, rather than a sudden collapse in the loonie. Shifts in market expectations for US interest rates have pushed the dollar higher, pressuring major currencies including the Canadian dollar, euro, yen, and pound. Di Matteo added that the US economy continues to grow strongly, and amid rising global uncertainty and persistent Middle East tensions, the dollar is viewed by investors as a safe asset, with sustained capital inflows further suppressing the Canadian dollar's performance.

**Canada's Domestic Fundamentals Weigh**

Beyond external factors, Canada's own economic fundamentals remain weak. Reports indicate that Canada's economy has contracted for two consecutive quarters, entering a technical recession, which undermines support for the loonie. Despite elevated oil prices, economic weakness and poor export performance prevent the Canadian dollar from gaining momentum from energy price increases.