Canadian Dollar gains strength as rising oil prices drive USD/CAD depreciation
- Higher crude oil prices boosted the Canadian Dollar, putting downward pressure on the USD/CAD pair.
- Drone attacks targeting Saudi and Russian oil infrastructure heightened market fears over energy supply disruptions.
- Geopolitical risks and Fed interest-rate policy uncertainty continue to shape broader market sentiment.
USD/CAD extends its losing streak for the sixth consecutive day, trading around 1.4040 during Asian hours on Thursday. The currency pair experienced downward pressure as the commodity-linked Canadian Dollar (CAD) gained strength from a rally in crude oil prices. Oil prices advanced following a drone attack on Saudi Aramco’s Shaybah oil field that resulted in two casualties, intensifying geopolitical friction in the Middle East and raising concerns over potential energy supply disruptions.
Adding to the regional geopolitical complexity, Iranian Foreign Minister Abbas Araghchi stated on Wednesday that the United States must lift its naval blockade and demonstrate a genuine commitment to a diplomatic resolution. Araghchi emphasized Tehran's readiness to resume negotiations if there is concrete evidence of a sincere American effort toward a just and permanent end to the conflict.
In tandem, Ukraine executed large-scale drone strikes against critical Russian oil infrastructure this week, signaling Kyiv's intent to impede Moscow's planned expansion of diesel exports under a recent agreement between Presidents Trump and Putin.
Meanwhile, market participants are carefully evaluating the trajectory of the Federal Reserve’s (Fed) monetary policy leading into next week’s meeting. Uncertainty persists after Fed Chair Kevin Warsh refrained last week from offering guidance on the timing or necessity of future interest rate hikes.
USD/CAD under pressure as IMF highlights widening North American growth gap
Strategists at Societe Generale flag that the latest IMF projections underscore a deteriorating relative backdrop for Canada, noting that “with the IMF’s US growth forecast revised up to 2.5% this year (while remaining at 2.1% in 2027), the North American growth gap is widening.” They point out that “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, but the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada,” reinforcing the idea of weaker Canadian momentum. At the same time, Societe Generale highlight the policy and market-rate dimension, observing that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” underlining how relative front-end yields continue to frame the Canadian Dollar’s performance against the US Dollar.
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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