Why the Canadian Dollar’s Slip to 1.37 Signals a Bear: Investors Must Know

• You may be underestimating the impact of a widening US‑Canada yield gap.
• Oil’s recent pull‑back erodes the commodity cushion that usually props up the loonie.
• Bank of Canada’s pause at 2.25% could become a liability if US rates keep climbing.
• The Supreme Court’s tariff ruling offers only a short‑lived sentiment boost.
• Positioning now can capture upside if the dollar rebounds, but a bear scenario looms if divergence deepens.

You missed the early warning sign that’s dragging the loonie lower.

Why the Canadian Dollar’s Decline Mirrors US Yield Gap Widening

The loonie slipped toward 1.37 per U.S. dollar, flirting with its monthly low. The primary driver is the accelerating gap between U.S. Treasury yields and comparable Canadian benchmarks. When U.S. 10‑year yields surge, investors chase higher‑yielding dollars, siphoning capital from lower‑yielding assets, including the Canadian dollar.

Core PCE inflation—a Fed‑preferred gauge—recently posted a 3% annual rise, reinforcing the narrative of a still‑hawkish monetary stance in Washington. Higher inflation expectations push the Fed toward additional rate hikes, widening the yield differential. In contrast, the Bank of Canada (BoC) left its policy rate steady at 2.25% after January CPI cooled to 2.6%, signaling a more patient approach. The resulting yield gap of roughly 150 basis points now exerts downward pressure on the loonie.

Impact of Oil Price Retreat on Canada’s Currency Fundamentals

Canada’s economy is heavily intertwined with energy exports. Oil price dynamics therefore act as a currency floor. Over the past week, crude futures gave back a portion of their weekly gains, even after a sizable U.S. inventory draw of 9 million barrels. The net effect: a softer commodity backdrop that removes a key source of foreign‑exchange inflow.

When oil prices slump, trade‑surplus projections shrink, and foreign investors reassess exposure to a resource‑driven economy. Historically, a 10% decline in Brent crude has translated into roughly a 3‑4% depreciation in the Canadian dollar within a month. The recent retreat, though modest, already nudged the loonie toward its lower threshold.

How the Supreme Court Tariff Ruling Shapes Trade‑Policy Sentiment

Last Friday, the U.S. Supreme Court struck down emergency tariffs that had been levied on imported goods. The decision sparked a brief rally in risk‑on assets and injected optimism into markets that had been braced for heightened trade friction. However, the loonie’s resilience was short‑lived; the currency quickly re‑asserted its decline as macro fundamentals re‑asserted dominance.

Trade‑policy relief can boost sentiment, but it rarely overturns structural forces such as yield differentials and commodity price trends. In prior episodes—most notably the 2018 tariff escalations—initial market euphoria faded within days, leaving FX rates to revert to fundamentals.

Bank of Canada’s Policy Pause: What It Means for the Loonie

The BoC’s decision to hold rates steady reflects a balancing act. Domestic inflation eased to 2.6% in January, easing pressure to tighten further. Yet the central bank is also mindful of a sluggish U.S. GDP growth of 1.4%, which hints at a slower‑than‑expected global recovery.

By keeping the policy rate at 2.25%, the BoC signals that it believes current conditions are “appropriate.” For investors, this stance can be a double‑edged sword: it protects against a premature rate hike that could hurt growth, but it also leaves Canada vulnerable to an even larger yield gap if the Fed continues to raise rates.

Investor Playbook: Bull vs. Bear Cases for the Canadian Dollar

Bull Case

• Oil rebounds above $85 per barrel, restoring the commodity cushion.
• U.S. yields peak and the Fed signals a pause, narrowing the yield gap.
• Further trade‑policy optimism, perhaps via additional tariff rollbacks, lifts risk sentiment.
• Bank of Canada initiates a rate hike in response to a sudden inflation spike, narrowing the differential.

If two or more of these catalysts materialize, the loonie could rally back toward the 1.30‑1.32 range, rewarding long positions and currency‑hedged portfolios.

Bear Case

• U.S. Treasury yields continue to climb, pushing the yield gap beyond 200 basis points.
• Oil prices stay under $80, eroding Canada’s trade surplus.
• Geopolitical tensions—particularly U.S.–Iran flashpoints—drive investors toward the U.S. dollar as a safe haven.
• BoC maintains a dovish stance while the Fed tightens, creating a sustained divergence.

Under this scenario, the loonie could slip below 1.40, pressuring exporters and Canadian‑linked equity exposures. Short positions, inverse ETFs, or FX forward contracts become viable defensive tools.

In summary, the Canadian dollar is at a crossroads where macro‑economic tides, commodity currents, and policy decisions intersect. Whether the currency recovers or slides further hinges on which of these forces gains the upper hand. Position now with a clear view of both the bullish and bearish pathways, and keep a close eye on yield spreads, oil price movements, and policy signals from both Ottawa and Washington.