Canadian Dollar gains amid elevated oil prices, escalating US trade sanctions
- CAD draws support from surging global crude oil prices driven by escalating Middle East military conflicts.
- US trade measures ban key Canadian exports like motor vehicles and dairy following mutual tariff escalations.
- Energy exports cushion the CAD against broader trade friction and economic headwinds from Washington.
USD/CAD remains subdued for the third successive day, trading around 1.3780 during the Asian hours on Wednesday. The currency pair loses ground as the commodity-linked Canadian Dollar (CAD) draws support from elevated oil prices, given Canada's position as one of the world's leading crude exporters.
Crude oil prices have climbed following a US strike on several Iranian tankers near Kharg Island, a major export hub. These attacks have heightened geopolitical tensions and stoked market concerns regarding potential disruptions to global oil supplies. A US official stated that the strikes were executed in response to an attempted missile attack on a US warship. In retaliation, Tehran launched ballistic missiles toward Jordan and issued warnings to vessels in the Persian Gulf, urging tanker crews near Kuwaiti and Bahraini ports to immediately abandon their vessels.
Concurrently, economic tensions are escalating on the trade front. According to BBC reports, US President Donald Trump is banning select Canadian products, including alcohol, dairy, and motor vehicles, as Canadian retaliatory tariffs on American goods come into force. The new restrictive measures, set to take effect by September 29, follow Canada's implementation of tariffs on billions of dollars' worth of imported American goods.
Political pressure on the Fed intensifies as US trade tensions escalate
Strategists at Scotiabank note that US trade frictions are broadening, with “trade tensions also rising, with President Trump on social media over the past few days to take aim at Canada as Ottawa imposes counter-tariffs.” They highlight that the administration’s campaign for easier policy is becoming more explicit, pointing out that “the president also appeared to threaten a broader trade war unless the Fed cut interest rates in a post last Friday following the strong jobs data as the administration’s pressure campaign for lower rates appears to be stepping up a gear.” Scotiabank adds that the political drumbeat is not limited to the White House, as “VP Vance also suggested the Fed should ease policy last week.”
Technical Analysis: USD/CAD weakens due to near-term bearish bias
In the daily chart, USD/CAD trades at 1.3780, keeping a bearish near-term bias as spot holds beneath both the short- and medium-term Exponential Moving Averages (EMAs). The pair is capped first by the nine-day EMA around 1.3819, with the 50-day EMA higher near 1.3920 reinforcing the overhead supply and signalling that rebounds are likely to meet selling interest. The 14-day Relative Strength Index (RSI) at about 38 stays below the midline, hinting that downside pressure still outweighs buying interest despite the absence of oversold extremes.
On the topside, a daily close above the nine-day EMA would be the first sign that sellers are losing control, though only a recovery toward the 50-day EMA would start to erode the broader bearish structure. Until these resistances are reclaimed, rallies are likely to be viewed as corrective within the prevailing downbeat tone.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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