The Canadian dollar has pulled back from the brink of falling below 70 cents US, even after the United States declined to re-sign the Canada-U.S.-Mexico Agreement (CUSMA), triggering annual reviews of the trilateral pact. The loonie came perilously close to breaching that threshold as June wound down, but it recovered and posted tentative gains on Thursday after falling to a year-to-date low of 70.26 cents US on June 24.
CUSMA Decision Adds Headwinds but May Be Priced In
In theory, the decision on CUSMA adds to the headwinds facing the loonie from a weak economy, falling oil prices and a neutral Bank of Canada, said Karl Schamotta, chief market strategist at Corpay, a corporate payments company, in a note on Thursday. However, the move was well telegraphed and may already be priced in, suggesting the risk profile facing the currency may not be as negative as some have suggested.
It has been a tough year for the Canadian dollar, which is down just over three per cent from the start of the year and off nearly five per cent from the closing high of 74 cents US reached on Jan. 29. The loonie has faced several headwinds, including a global flight to the U.S. dollar due partly to investors seeking safety after the outbreak of the Iran conflict.
Global Factors Pressure the Loonie
Data from the International Monetary Fund indicated that official currency reserves of the U.S. dollar rose in the first quarter of 2026, and by no little bit, said Warren Lovely, chief rates strategist at National Bank of Canada, in a report on Thursday. Lovely said the buying coincided with the war in Iran, but that the longer de-dollarization trend is probably still intact.
Canada’s currency also suffered as bets rose that the U.S. Federal Reserve would need to hike interest rates to combat oil-induced inflation from the war. That caused the yield on Canadian and U.S. bonds to widen further in favour of Treasuries, leaving the greenback much more attractive to investors.
Weak U.S. Jobs Data Eases Pressure on Loonie
On Thursday, that dynamic eased slightly in favour of the loonie as the U.S. Bureau of Labor Statistics reported just over 57,000 positions were created in June, well off estimates for 113,000 additions to the jobs market. Meanwhile, numbers for April and May were also revised lower, adding up to a two-month loss of almost 75,000 jobs.
In the wake of the data release, bets for a rate hike at the July 29 Fed meeting weakened to an 18 per cent chance from a nearly 30 per cent chance, while markets cut the odds of an increase in September to around 60 per cent from 80 per cent, according to overnight interest rate swap data from Bloomberg. However, markets were still all in on a hike in October.
That could ramp up the pressure on the loonie as it would widen the interest rate differential between the Fed and the Bank of Canada, which has been on hold for the last five consecutive rate calls, with most economists expecting it to stay the course at the current level of 2.25 per cent well into 2027.
