In the current landscape of the foreign exchange market, the USD/CAD currency pair is encountering significant constraints. A recent analysis from HSBC highlights two primary factors that are limiting the potential appreciation of the USD against the CAD: strong oil prices and a revised approach to US trade policy as of March 2025.
This situation has important ramifications for traders, multinational corporations, and policymakers involved in the North American economy. The interaction between Canada”s resource-driven economy and the strategic decisions made by the United States creates a tightly controlled trading environment for the USD/CAD pair.
Key Influences on the USD/CAD Forecast
HSBC”s currency analysts have identified a distinct ceiling for the USD/CAD exchange rate. This ceiling does not arise from a single influence but rather from a combination of macroeconomic factors. First, global oil prices have shown unexpected resilience, providing fundamental support for the Canadian dollar, often referred to as a “commodity currency.” Second, the US administration has adopted a notably gentler stance in bilateral trade relations, which alleviates a traditional obstacle for the Canadian economy.
As a result, the usual drivers that favor USD strength against the CAD are facing considerable resistance. Market participants are paying close attention to the correlation between West Texas Intermediate (WTI) crude oil prices and the Canadian dollar, as historically, a 10% increase in oil prices has been linked to a 1.5% rise in the CAD relative to the USD.
The Impact of Oil Prices on Currency Strength
Canada ranks as the fourth-largest oil producer globally and is a significant exporter to the United States. Elevated global oil prices enhance Canada”s trade balance, leading to increased corporate revenues, greater government royalty income, and an improved national current account. This financial uplift translates into higher demand for the Canadian dollar, as international buyers need CAD to purchase Canadian crude. Additionally, profits in the energy sector often catalyze heightened capital investment and job creation, further stimulating economic activity.
Shifts in US Trade Policy
The second major factor in HSBC”s analysis is the observable easing of tensions in US-Canada trade relations. The years from 2018 to 2023 were characterized by notable friction, including tariffs and negotiations surrounding the USMCA trade agreement. However, the current US administration appears to prioritize supply chain stability and cooperation with allies, leading to a more collaborative trade framework. This reduction in trade uncertainty is favorable for Canadian assets, enhancing demand for the CAD.
The following table summarizes key policy shifts affecting trade relations:
- Policy Area: Bilateral Tariffs – Previous Stance: Threatened or imposed on select goods; Current Stance: Dormant, focus on dispute resolution – Impact on CAD: Positive, reduces uncertainty.
- Policy Area: Energy Cooperation – Previous Stance: Mixed signals on cross-border projects; Current Stance: Explicit support for integrated energy security – Impact on CAD: Positive, supports export sector.
- Policy Area: Buy American Provisions – Previous Stance: Stringent application causing friction; Current Stance: More flexible interpretations for allies – Impact on CAD: Neutral to Positive.
- Policy Area: Interest Rate Differentials – Previous Stance: Aggressive cuts expected; Current Stance: Cautious approach from the Bank of Canada – Impact on CAD: Supportive.
The monetary policy stance of the Bank of Canada (BoC) also plays a critical role in this analysis. The BoC is currently adopting a data-driven but vigilant approach, which provides additional support for the Canadian dollar. With oil sector revenues enhancing government finances and consumer spending, there is less pressure for the BoC to implement drastic rate cuts compared to other central banks.
Meanwhile, the US Federal Reserve”s cautious strategy restricts the interest rate differential that could typically drive the USD/CAD higher, reinforcing the range-bound trading scenario presented by HSBC.
Market behaviors reflect the impact of these dual forces. Futures and options data indicate that speculative net-short positions on the Canadian dollar have noticeably decreased. At the same time, implied volatility for the USD/CAD pair has declined, signaling lower expected price fluctuations.
Resistance levels, particularly around the 1.3850 mark, have proven challenging for the USD/CAD pair to maintain. Each attempt to rise has encountered selling pressure, often correlated with increases in oil prices or positive economic data from Canada.
In conclusion, the forecast for the USD/CAD pair as analyzed by HSBC paints a picture of constraint. The synergistic effect of resilient oil markets coupled with a less confrontational US trade policy establishes a robust ceiling for the exchange rate. This situation highlights the Canadian dollar”s responsiveness to both commodity cycles and its unique geopolitical relationship with the United States.
