Written by the Market Insights Team
A triple blow
Kevin Ford – FX & Macro Strategist
The primary driver for the Loonie in the short term will continue to be dollar weakness. The DXY index has taken another hit, reaching its lowest level since April 2022. In April alone, the DXY has dropped 5.7%, while the USD/CAD has gained 3.9%. This time, President Trump’s demand for Federal Reserve Chair Jerome Powell to cut rates ‘now’ has undermined the Fed’s independence and weakened the greenback.
Investor sentiment toward the Loonie has shifted significantly, with bearish positions now at their lowest since January 2021. This is evident in the one-year USD/CAD risk reversal, which has moved in favor of calls—marking the least bearish close for the Loonie in over two years.
This shift is further reflected in the unwinding of short positions, aligning with prices that have nearly erased all gains since President Trump’s election. Despite weak fundamentals highlighted by the Bank of Canada in its latest meeting, the outlook for the Loonie remains stable in the short-term.
And while the Loonie keeps trading closer to the 1.38, its lowest level since November last year, the 2 year yield differential between the U.S. and Canada remains sticky, possibly indicating that the current price movement might be subject to a medium-term rebound to revisit the upper side of the 1.373-1.40 trading range.
In the FX options market, yesterday’s spike in volatility prompted investors to cover short-term positions. This comes as Canadians prepare to elect a new Prime Minister in less than a week. Polls suggest a Liberal victory, which is unlikely to impact the Loonie’s short-term price. However, concerns linger over a potential rise in the debt-to-GDP ratio under Liberal leadership.
Meanwhile, the broader North American market has been grappling with the effects of U.S. dollar weakness. Investors face a triple blow: equities selling off, bonds under pressure, and the dollar losing ground. Gold and other metals have emerged as safe havens, but asset managers are struggling to reallocate tactically as correlations break down. The market’s message is clear—there’s a growing desire to exit U.S. assets, particularly among foreign investors who have been hit hardest by this unusual trifecta.
This week’s macro spotlight will be on April’s manufacturing data from Europe, Japan, and the U.S. As the week wraps up, attention will shift to Canada’s February retail sales figures and the final University of Michigan sentiment survey for April.
Euro at 2021 highs
George Vessey – Lead FX & Macro Strategist
The euro extended its rally on Monday to hit its highest level since November 2021 versus the US dollar – above our short-term upside target of $1.15. Investors are increasingly questioning the dollar’s dominance in the global financial system whilst turning to the common currency as an alternative.
EUR/USD has soared 13% since February, marking one of the fastest and largest euro advances in the past five years and in the top 5% of its best starts to a year on a record. Despite the remarkable rally already, further gains may still be on the horizon. If the common currency replicates the dramatic turnaround seen in 2023, EUR/USD could climb closer to $1.20. Interestingly, this surge comes as the European Central Bank shifts from aggressive rate hikes two years ago to easing policies today. While some indicators suggest the euro may be overextended, the ongoing global trade war could limit any significant pullbacks, supporting continued euro strength.
On the agenda this week, European officials are convening in Washington to address what many are calling the worst global trade crisis in a century. Tariffs are set to dominate discussions at the spring meetings of the International Monetary Fund and World Bank, as well as the G20 gathering of finance ministers and central bankers. The urgency stems from US threats to withdraw from the very multilateral institutions it helped establish, raising concerns about the stability of the global financial system.
On the data docket, flash industry PMIs are in the spot light to gauge the health of major economies whilst Germany’s Ifo index – a leading indicator for economic activity – will also be closely monitored.
Dollar index down 2%, near 3-year lows
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 21-25
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.