Canadian Dollar Set for Fourth Weekly Gain as US Dollar Weakens and Oil Prices Surge

The Canadian Dollar is heading for its fourth consecutive weekly gain as USD/CAD trades near mid-May lows, supported by elevated crude oil prices, robust Canadian retail sales, and heavy selling pressure on the Greenback.

The Canadian Dollar has maintained its upward momentum against the Greenback, pushing the USD/CAD currency pair down to its lowest level since mid-May. The Canadian currency is currently positioned to lock in its fourth consecutive weekly gain. Severe selling pressure has gripped the US Dollar due to scaling-back Fed rate-hike expectations, mounting institutional credibility concerns, and weak US macroeconomic indicators. Concurrently, strong Canadian retail sales data and elevated crude oil prices have provided substantial fundamental support to the Loonie.

US Treasury Buyback Expansion and Institutional Credibility Pressure
The US Dollar Index (DXY), which gauges the Greenback against a basket of six major foreign currencies, is hovering near 98.75, trading close to three-month lows. Heavy selling hit the US currency after the US Treasury Department unexpectedly departed from its set calendar on Wednesday at 12:32 GMT. The department announced it would double the maximum size of liquidity-support buyback operations for 10-year to 20-year and 20-year to 30-year government debt instruments, expanding the cap from $2 billion per operation to at least $4 billion. This expanded facility will take effect on September 9 and remain active through November 4.

Market analysis from TD Securities highlighted that the Greenback was already on the verge of a structural sentiment shift following muted July CPI figures and negative retail sales data. Analysts noted that rising concerns over US institutional credibility alongside potential financial repression risks stemming from the aggressive Treasury buyback program have consolidated the broader bearish USD trajectory. Consequently, financial market participants are pricing in reduced odds of further rate increases by the Federal Reserve.

Crude Oil Surge and Temporary Tariff Relief
As petroleum represents Canada's primary export, energy market fluctuations exert an immediate influence on the valuation of the Canadian Dollar. Amid an ongoing geopolitical stalemate between the United States and Iran, crude oil prices have remained elevated. West Texas Intermediate (WTI) crude is trading around $86.70 per barrel, tracking a weekly advance of more than 6%. Higher crude benchmark prices significantly improve Canada's terms of trade and reinforce underlying currency demand.

Trade developments have also supplied a favorable catalyst. US President Donald Trump announced a three-day pause on planned 50% tariffs on imports from Canada. This temporary reprieve has temporarily alleviated bilateral trade friction, bolstering investor appetite for Canadian assets.

Canadian Retail Sales Beat Expectations Ahead of US PMI Data
On the economic data front, Statistics Canada reported that domestic Retail Sales grew by 0.6% in June, outperforming consensus forecasts of a 0.4% increase. Core Retail Sales, excluding automobiles, rose 0.5%, also topping expectations of 0.4%, even though both measures moderated compared to prior-month readings. The resilient consumer spending metrics helped reinforce the Canadian Dollar's strength.

Market participants are now focusing on preliminary August US S&P Global Purchasing Managers Index (PMI) releases. Forecasts point toward a modest deceleration in US economic momentum, with the Manufacturing PMI expected to ease to 53.8 from July's 53.9, and the Services PMI projected to tick down to 54.0 from 54.6 in the previous month.

Bank of Canada Policy Dynamics and Core CAD Drivers
The Bank of Canada (BoC) exerts a decisive influence on the domestic currency by setting benchmark interest rates that govern interbank borrowing costs. The BoC operates under an inflation-targeting framework of 1% to 3%. Higher relative interest rates attract international yield-seeking capital, increasing demand for the Canadian Dollar. Furthermore, while traditional economic theory viewed inflation as currency-negative due to purchasing power erosion, modern capital flows mean higher inflation expectations often lead central banks to raise policy rates, stimulating capital inflows and appreciating the currency. Conversely, quantitative easing measures tend to be CAD-negative while quantitative tightening supports currency strength.

Canada's trade balance—representing the value of exports minus imports—is deeply tied to oil prices. Higher energy export revenue widens the trade surplus, directly boosting currency demand. Market risk sentiment also dictates currency trajectory: during risk-on environments, investors allocate capital toward growth-linked currencies like CAD. Given that the United States is Canada's largest trading partner, US macroeconomic stability remains a vital external driver of CAD exchange rates.

Broader Foreign Exchange Movements and Gold Retest
Weakness in the US Dollar has resonated across global currency markets. GBP/USD advanced past 1.3670 to hit its highest level since February following encouraging UK PMI numbers, before consolidating below 1.3650. EUR/USD similarly corrected lower to trade below 1.1700 after mixed PMI readings from Germany and the Eurozone, though ongoing USD weakness limited downside momentum.

In precious metals, Gold extended its weekly gains on Friday, with bullish traders eyeing a retest of the $4,600 resistance zone—the upper boundary of its six-month trading range. The liquidity boost announced by the US Treasury and the resulting slide in the Dollar have generated strong tailwinds for Gold and precious metals.

Cryptocurrency Rally Led by Bitcoin Surge
Digital asset markets are mirroring the risk-on sentiment observed in commodities. Bitcoin (BTC) broke above the $77,000 mark on Friday, pulling the broader cryptocurrency market higher. Altcoins mirrored BTC's upward momentum, with Ethereum (ETH) trading near $2,400 and Ripple (XRP) consolidating near $1.35 as lower US Dollar valuations and global liquidity expectations support crypto assets.

What this means for you
In Forex Markets: A weakening US Dollar provides strength to major currencies like the Canadian Dollar, Euro, and British Pound.

For Investors: Higher crude oil and gold prices offer positive momentum for commodity traders, while USD volatility could impact global asset allocations.

Questions & Answers

1. What is driving the decline in the USD/CAD currency pair?
The USD/CAD pair reached mid-May lows primarily due to US Dollar weakness caused by the US Treasury's expanded buyback program and softer US economic data.

2. How do crude oil prices impact the Canadian Dollar?
Crude oil is Canada's primary export. Rising oil prices, such as WTI reaching $86.70, increase export revenues and boost aggregate demand for the Canadian Dollar.

3. What changes were announced regarding US Treasury buybacks?
The US Treasury announced it would double liquidity-support buybacks for 10-year to 30-year government debt from $2 billion up to at least $4 billion per operation.

4. What were the Canadian retail sales figures for June?
Canadian Retail Sales grew 0.6% in June, beating expectations of a 0.4% increase, while sales excluding autos rose 0.5% against a 0.4% forecast.

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