Factors that have weighed on the Canadian dollar recently, including lower oil prices and shifting interest-rate expectations in the U.S. are exaggerated, even as upcoming trade talks and economic weakness weigh, Commerzbank said in a note.
As recently as late April, the outlook was for a stronger Canadian currency, with the U.S. dollar versus the loonie briefly dipping below $1.36 as higher oil prices and Canada's position as a major energy exporter provided support amid Iran-war disruptions, Commerzbank wrote Thursday.
"These figures seem almost like something from another era when compared to the current ones," Commerzbank said. The greenback versus the loonie has climbed more than $0.06 to above $1.42, its highest since early April 2025.
The move was driven by oil prices falling from their mid-April peak toward pre-Iran war levels, weakening Canada's terms of trade. Also, interest rate expectations have shifted, with limited Bank of Canada tightening priced in, but up to 40 basis points of Federal Reserve increases by next March, widening the U.S. dollar rate advantage.
"We strongly believe that both of these factors are exaggerated," Commerzbank said.
Oil may have overshot on expectations of supply normalization, while Fed hikes are unlikely to materialize, the bank said.
While trade uncertainty amid trade negotiations with the U.S. and weaker growth continue to weigh, the level of the U.S. dollar against it Canadian counterpart looks stretched, and further appreciation likely requires a "great deal" for it to happen, the bank said.