The Canadian dollar has edged closer to 1.39 against the US dollar, maintaining a narrow trading range near the lows observed in early December. This movement reflects the contrasting forces of renewed US dollar strength and declining oil prices, which counterbalance the generally supportive domestic fundamentals in Canada. The US dollar's rise was bolstered by a significant drop in initial jobless claims, reinforcing confidence in the resilience of the US labor market and decreasing the likelihood of immediate Federal Reserve easing. Additionally, a more composed stance by President Trump regarding Iran has alleviated the geopolitical risk premium in crude oil, leading to lower oil prices and weakening the Canadian dollar's terms of trade support.
Domestically, the upside for the Canadian dollar remains limited by softer labor market dynamics—unemployment is hovering around 6.8%, which sustains the Bank of Canada's neutral position and restricts the potential for tighter financial conditions to bolster the currency. Nonetheless, any downward pressure on the Canadian dollar is restrained by modest improvements in broader fundamentals. Earlier increases in the prices of oil and gold, along with stabilized rate spreads, continue to offer a protective floor for the currency.
