Key Takeaways
- A shift in policy outlooks for the US and Canadian central banks is driving the loonie higher, analysts say.
- Improving economic data has provided further support for the Canadian dollar.
- Ongoing trade uncertainty remains a risk for the Canadian dollar.
Early in the summer, the Canadian dollar was weighed down by uncertainty over Canada’s economic outlook and bullish sentiment toward the US dollar. But since July, the balance has shifted in the loonie’s favor.
On the Canadian side, strong jobs data and improved readings on the broader economy from the government’s gross domestic product reports provided a stronger base for the Canadian dollar. Meanwhile, south of the border, expectations for multiple interest-rate increases by the Federal Reserve, which had lifted the US dollar, have cooled.
As the Canadian economic data improved, the Canadian dollar rose 1.43% against the US dollar in July, closing the month at C$1.40 after trading at C$1.42 on June 30.
“July was a strong rebound month for the Canadian dollar, particularly after the weakness we saw in June,” says Steve Kulchyk, vice president of options dealing and structured products at Monex Canada. “The biggest driver was the shift in relative monetary policy expectations.”
Loonie Gains as Fed Policy Shift Weighs on the Greenback
In exchange rates, money often flows to the currency with higher present and expected interest rates. As expectations for interest rates change, that can drive a currency’s relative value up or down. Heading into the summer, the US dollar was on the rise after broad-based declines in 2025. A critical factor in its rally against the Canadian dollar and other currencies was a growing expectation that the Fed would be raising interest rates at least once in 2026, if not twice. Meanwhile, Canadian markets were priced for a single interest rate increase from the Bank of Canada, but many economists were not convinced such a hike was coming.
Against this backdrop, the Canadian dollar slid 3.5%, from C$1.37 against the US dollar at the start of the year to C$1.42 by the end of June, which many analysts attributed more to the US dollar’s strength than negative sentiment toward the loonie. But in mid-July, sentiment around the Fed shifted, beginning with an unexpected decline in the US Consumer Price Index.
That was followed later in the month by the Fed’s policymaking committee meeting, where comments by Chair Kevin Warsh left investors wondering about his commitment to raising rates. While Fed officials signaled a strong inclination toward a rate hike in June, “this message was notably muddled in the July press conference,” says Alex Cohen, FX strategist at BofA Securities. Market expectations for Fed rate hikes were pared back after investors perceived his commitment to bringing down inflation as “lacking substance,” he adds. The uncertainty about the Fed’s messaging has been “a significant, if not primary driver of the US dollar [weakness].”
A More Supportive Canadian Economic Outlook
Meanwhile, in Canada, the outlook for the Bank of Canada has shifted away from a potential rate hike later this year. Since moving to the sidelines in December 2025, the Bank has held its policy rate at 2.25%.
The loonie has found support in data showing the economy is on more solid footing than many economists expected, given lingering trade uncertainty with the United States. The Canadian economy has been showing signs of revival after dipping into a technical recession amid back-to-back contractions in the fourth quarter of 2025 and the first quarter of this year. But an advance estimate from Statistics Canada indicates that real gross domestic product grew 3.4% in the second quarter on an annualized basis. In a further sign of growing economic momentum, the labor market added a surprise 75,000 jobs in July.
“Canadian growth data has improved recently, reversing the trend of broader [Canadian dollar] softness in the spring and summer,” says BofA Securities’ Cohen. “Most notably, GDP has recovered after reflecting a technical recession earlier in the year, while the last two months of labor data have come in strong, exceeding expectations.”
The improvement in Canada has also come as some US economic indicators have lost momentum. “The trend of upside US data has slowed over recent weeks, most recently highlighted by the soft July employment report,” Cohen says.
Analysts See Positive Outlook for the Canadian Dollar
Analysts say the loonie could gain further if improvements in the Canadian economy gather momentum or the US dollar faces additional headwinds. “If Canadian economic data accelerates above our base case or bearish US dollar catalysts emerge (such as more currency intervention or a return of the ‘Sell America’ narrative), USD/CAD could see a more material decline to C$1.36-C$1.37,” says Jayati Bharadwaj, global FX strategist at TD Securities.
BofA Securities’ Cohen sees a similar possibility if the Canadian economy remains strong while US data falters. If “a further string of soft US data and further pricing out of Fed hikes [materialize], the pair could easily retest the lows of the year of around C$1.36.”
Trade Uncertainty Remains a Headwind
The Canadian dollar’s rebound comes despite continuing uncertainty over the country’s trade relationship with the US. As a heavily export-reliant currency, the loonie typically suffers during periods of trade friction, which drag on growth and stall business investment.
Canadian exports have continued to struggle following US President Donald Trump’s refusal to renew the Canada-United States-Mexico Agreement, the continental free trade treaty. The situation was further compounded by Trump’s decision to impose an additional 50% tariff penalty on select Canadian goods, including some that were sheltered from US tariffs under the existing trade agreement.
“CUSMA negotiations and the threat of additional US tariffs remain significant headwinds,” says Monex’s Kulchyk. “In my view, that trade uncertainty is one of the main reasons the Canadian dollar has not strengthened even further.”
For now, the currency market appears to have digested much of the tariff shock. But BofA Securities’ Cohen says that there remains the risk that “overall trade uncertainty persists to the point where Canadian business investment is affected.”
