Canadian Dollar Outlook: Fundamental Drivers and Technical Trends

Canadian Economic Performance and Trade Dynamics

Canada's manufacturing business activity index surged to 53.3 in April, marking its highest level since the pandemic. Growth was driven by increased output and new orders, largely benefiting from heightened energy demand and activity in the oil sector as global buyers seek to secure inventories amid geopolitical uncertainty.

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The trade balance shifted to a surplus in March, underpinned by falling imports and rising exports. Notably, the composition of Canadian trade is shifting; the share of exports destined for the United States has declined to 67% as of March, down from 76% in 2024, reflecting a diversification in trade flows that continues to support the Canadian dollar.

Monetary Policy and Growth Forecasts

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The Bank of Canada maintained its policy rate at 2.25% at its most recent meeting while retaining a hawkish bias. Market participants currently price in a 50% probability of a rate hike in June, with approximately 75 basis points of tightening anticipated by the end of the year.

Official economic projections have been revised upward, with GDP growth now forecast at 1.2% for this year and 1.6% for next year. Inflation expectations have also been nudged higher to 2.3% year-over-year, though analysts note that rising energy costs and potential fertilizer shortages could pose further upside risks to these figures.

USD/CAD Technical and Sentiment Analysis

Despite the bullish fundamental backdrop for the loonie, net speculative positioning remains in a net short position of CAD 2.81 billion. Concerns regarding a potential US recession, which would adversely impact Canadian export demand, continue to represent a significant downside risk for the currency.

The USD/CAD pair remains trapped in a sideways consolidation range. While recent geopolitical developments have pressured the US dollar, there is currently no clear catalyst for a sustained directional move. We anticipate continued range trading, with support established between 1.3525 and 1.3545, and potential resistance levels near 1.3710–1.3750 in the event of renewed market volatility.

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