Canadian Dollar holds steady amid oil uncertainties, hawkish Fed sentiment
- Canadian Dollar holds firm against US Dollar amid lingering geopolitical oil market uncertainties.
- Iran-US tension and potential Strait of Hormuz restrictions could drive crude oil prices upward.
- Strong US manufacturing data boosts expectations for an October Fed rate hike to 69.7%.
USD/CAD steadies after three days of gains, trading around 1.4100 during Asian hours on Thursday. The USD/CAD pair has moved little as the commodity-linked Canadian Dollar (CAD) maintains its position amid cautious sentiment surrounding oil prices.
Crude oil prices may rise due to lingering uncertainty surrounding United States-Iran diplomatic talks. Speaking at the UN General Assembly, Iranian President Masoud Pezeshkian declared that Tehran would not yield to threats, reaffirming the country's right to pursue nuclear technology for economic development. Pezeshkian also emphasized that Iran would restrict freedom of navigation through the strategic Strait of Hormuz for as long as US sanctions and blockades remain active.
CAD faces widening yield drag and seasonal Q4 headwinds
Strategists at Scotiabank caution that the Canadian Dollar’s underlying backdrop remains challenging, emphasizing that “wide spreads are the biggest drag on the CAD’s fundamental performance.” They add that “negative CAD seasonality in Q4 means the risk of stronger headwinds for the CAD in the coming weeks,” reinforcing the view that the currency could stay on the defensive as the year-end approaches.
However, the USD/CAD pair may gain ground as the US Dollar (USD) receives support from hawkish Federal Reserve (Fed) expectations and resilient domestic economic indicators. This momentum was highlighted by the latest Flash US S&P Global PMI data for September, which showed manufacturing expanding faster than expected at 52.0, helping offset slight pullbacks in services and composite activity.
Following US economic signals, market expectations for a 25-basis-point Fed rate hike in October surged to nearly 69.7%, up sharply from 48.7% last week. Traders are now turning their attention to the upcoming US weekly Initial Jobless Claims report. At the same time, several Fed officials have reiterated support for the recent rate increase and issued fresh warnings regarding persistent inflation risks.
Fed’s Barr flags more hikes as inflation risks rise, supporting Dollar upside
Fed’s Barr delivered a distinctly hawkish message, with an FXS Speechtracker score of 8/10, above the historical average of 7/10 and signaling a stronger-than-usual tightening bias. The assertion that “further rate hikes [are] likely needed to ensure timely return to 2% inflation,” alongside comments that inflation risks have increased while labor market risks have receded, underscores a clear preference for additional policy tightening in the face of strong growth and a solid labor market. By stating the Fed was “out of position” and needed to “recalibrate” policy, Barr reinforces the narrative that the current stance may still be too loose, a backdrop that is typically supportive for the Dollar and negative for risk-sensitive assets.
The FXS Fed Sentiment Index rose by 0.42 points to 148.81, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This move signals a meaningful reinforcement of the market’s perception that the Fed is biased toward further tightening, a dynamic that should continue to underpin Dollar strength against lower-yielding currencies.
Technical Analysis:
In the daily chart, USD/CAD trades at 1.4100. The pair holds firmly above both the nine- and 50-period Exponential Moving Averages (EMAs), which suggests a constructive bullish bias in the near term as short- and medium-term trend signals align. The 14-day Relative Strength Index (RSI) at 69.74 flirts with overbought territory, hinting that upside momentum is strong but vulnerable to bouts of consolidation or minor corrective pullbacks.
On the downside, immediate support emerges from the nine-period EMA at 1.4017, with the 50-period EMA at 1.3946 reinforcing a broader demand zone on deeper dips. As long as the USD/CAD pair holds above these moving averages, buyers are likely to defend setbacks, keeping the focus on the topside even if near-term gains become more measured given the stretched RSI backdrop.
(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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