Morgan Stanley has made a bold call, turning sharply bullish on the Canadian dollar (CAD) and laying out a series of compelling reasons that position the loonie as a top-performing currency in the second half of 2025.
1. Oil Markets Turning in Canada’s Favor
At the core of Morgan Stanley’s bullish thesis is oil. With Brent crude prices climbing steadily past $95 per barrel, the Canadian dollar is gaining significant tailwinds. As one of the world’s largest oil exporters, Canada directly benefits from rising energy prices. Morgan Stanley analysts expect global demand to remain firm while supply cuts by OPEC+ and geopolitical bottlenecks continue to tighten the market.
“Canada’s energy trade surplus is on the rise again,” the report states. “The improving terms of trade are highly supportive for the CAD.”
2. Hawkish Bank of Canada vs. a Dovish Fed
Another key factor driving Morgan Stanley’s CAD optimism is the diverging policy stance between the Bank of Canada (BoC) and the U.S. Federal Reserve.
While the Fed has already initiated rate cuts amid signs of softening U.S. growth, the BoC has adopted a more measured tone, holding its benchmark rate steady and signaling it may remain restrictive for longer if inflation pressures persist.
This divergence in monetary policy expectations is creating a favorable yield spread for CAD. “Markets are underpricing the hawkish bias of the BoC,” the bank argues, noting that this creates upside risk for the loonie.
3. Strong Canadian Economic Momentum
Canada’s economic fundamentals have also improved. Despite global uncertainty, Canadian GDP has shown surprising resilience, supported by robust job creation, population growth, and strong consumer spending in major provinces like Ontario and British Columbia.
Additionally, with housing activity rebounding and infrastructure spending accelerating, Morgan Stanley expects domestic demand to continue supporting growth — another CAD-positive dynamic.
4. Attractive Valuation and Positioning
The CAD is also seen as undervalued based on long-term models. With many speculative investors still underweight the currency, there is ample room for positioning to shift in its favor, Morgan Stanley says.
“From a technical and sentiment perspective, CAD is ripe for a bullish breakout — especially against low-yielders like the Japanese yen or the Swiss franc.”
Top Trade Ideas
Morgan Stanley’s top trade recommendations include:
Long CAD/JPY, targeting 116.00 in Q3 Short EUR/CAD, citing weakening Eurozone growth and relative strength in Canada Long CAD against the USD, especially if the Fed cuts more aggressively than expected
Bottom Line:
Morgan Stanley’s bullish call on the Canadian dollar is grounded in strong fundamentals, rising oil prices, policy divergence, and favorable market positioning. As global FX markets become increasingly macro-driven in 2025, the loonie may just be one of the most compelling plays on the board.
Disclosure: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research or consult a financial advisor before making trading decisions.
