The Canadian dollar strengthened to its highest level in two and a half months on Wednesday, as a brief pause in U.S. tariff threats provided temporary relief. However, market analysts caution that the underlying trade dispute continues to cast a shadow, with risk skewed toward further depreciation.
USD/CAD fell to 1.3823, meaning one Canadian dollar now buys 72.34 U.S. cents. The loonie advanced 0.5% during North American trading hours, reaching its strongest point since June 2. The move followed a three-day suspension of fresh U.S. tariffs on Canadian goods, a development that eased immediate trade pressures.
Despite the upbeat momentum, the relief may be short-lived. The tariff pause is limited to just three days, and negotiations are ongoing. Should talks collapse, tariffs could be reinstated, potentially pushing USD/CAD above the 1.40 level. Conversely, a durable agreement could bring the pair down to 1.37, a level identified by analysts at Monex Europe as consistent with a long-term resolution.
The asymmetric risk is evident in the numbers. From the current spot rate of 1.3823, a sustained deal would represent a 0.9% decline in the pair, while a breakdown could trigger a rise of at least 1.3% above 1.40. This translates to a downside risk that outweighs the upside by roughly 1.4 times, according to Monex analysts.
Adding to the supportive backdrop, the U.S. dollar index slipped 0.72% to 98.93, its weakest level since late May, as Treasury yields declined. The 30-year U.S. Treasury yield fell nearly 10 basis points, reflecting a global trend that has bolstered the Canadian dollar. Oil prices also contributed modestly, with West Texas Intermediate crude gaining 0.6% to $85.41 per barrel, benefiting Canada as a major oil exporter.
Canada's domestic inflation data provided additional context. Headline CPI eased to 2.8% in June, while core measures CPI-trim and CPI-median stood at 1.8% and 1.9%, respectively. The Bank of Canada kept its overnight rate at 2.25% in July, and the next decision is scheduled for September 2. Milder inflation gives the central bank room to pause, potentially limiting further currency gains.
Looking ahead, analysts at ING Groep hold a positive outlook for the Canadian dollar, projecting 1.38 by year-end and 1.36 in 12 months, citing a generally weaker U.S. dollar. Canadian Imperial Bank of Commerce sees steady strengthening, while Commerzbank expects a recovery with interruptions. Toronto-Dominion Bank forecasts the loonie at 1.34 by late 2026, assuming the USMCA remains intact.
For now, investors face a tight deadline. The three-day window means the market's near-term range remains asymmetric, with the potential for a failed deal carrying more weight than a successful one. The key question is whether the pause will evolve into a formal agreement, or whether tariffs will return, sending the loonie back toward 1.40.
