Canadian Dollar gathers strength on elevated oil prices
- USD/CAD extends its downside to near 1.4025 in Thursday’s early European session.
- Economists expect the BoC to raise rates next week.
- Iran signalled that there was little reason to expect progress in talks with US.
The USD/CAD pair weakens to around 1.4025 during the early European trading hours on Thursday. The pair hits the lowest since September 21 as elevated crude oil prices underpin the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). The weekly US Initial Jobless Claims data is due later on Thursday. On Friday, Canada’s Retail Sales and US Purchasing Managers Index (PMI) reports will be the highlights.
The Bank of Canada (BoC) has held its key interest rate unchanged for about a year, but some economists anticipate rates to begin rising again at the upcoming policy meeting next week, which would be the first hike in more than three years.
Swap market data indicates an 80% probability the Canadian central bank lifts its benchmark interest rate by 25 basis points (bps) to 2.50% on October 28, according to Reuters.
Meanwhile, crude oil prices jumped as tensions between the US and Iran deepened. Iranian Foreign Minister Abbas Araqchi said that there was little reason to expect progress in talks with Washington, adding that Tehran was fully prepared to defend itself, per the Financial Times.
Iranian President Masoud Pezeshkian stated that the US could not expect Tehran to engage in dialogue while continuing to blockade and threaten it. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
USD/CAD under pressure as IMF highlights widening North American growth gap
Strategists at Societe Generale highlight that the latest IMF projections underscore a growing divergence in North American prospects, with the Fund now seeing US growth at “2.5% this year (while remaining at 2.1% in 2027),” a profile that contrasts with a notably softer outlook for Canada. They note that “the North American growth gap is widening,” pointing out that while “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, … the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada.” Against this backdrop, Societe Generale draw attention to the policy and market backdrop, observing that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” underlining the importance of relative rate expectations in shaping the Canadian Dollar’s performance.
Warsh flags investment surge and AI risks while keeping Fed options open
Fed Chair Warsh delivered a moderately cautious tone, with the FXS Speechtracker score of 5.6/10 coming in slightly below the 6.1/10 historical average, suggesting a touch less conviction than the established baseline. The admission of being “over-scarred” by the Global Financial Crisis, combined with emphasis on structural growth, an investment surge, and upcoming “crystalizing” meetings, underscores a risk-aware stance that balances optimism on investment and AI with sensitivity to downside and financial stability risks. Warsh’s refusal to pre-commit on October and December decisions, and focus on AI’s uncertain near-term employment impact, reinforces a data-dependent posture that tempers any overtly hawkish signal for the Dollar.
The FXS Fed Sentiment Index was unchanged, rising by 0.00 points to a still-elevated 127.51, indicating that despite the slightly softer FXS Speechtracker score, the broader policy signal remains firmly in hawkish territory. This stable, above-100 reading suggests markets continue to price a Fed that is committed to price stability and attentive to investment- and AI-driven upside risks, even as near-term guidance remains deliberately non-committal.
Technical Analysis: Negative tone of USD/CAD remains intact below the 100-day SMA
On the topside, immediate resistance is seen in the 1.4040-1.4045 zone, representing the lower Bollinger band and the 100-day moving average. Any follow-through buying above this zone would ease the immediate downside pressure and open the way toward the Bollinger midline around 1.4190 and the upper band near 1.4330.
On the downside, the key support level emerges at the 1.4000 psychological level, followed by the August 31 high of 1.3912. Further south, the next contention level to watch is the September 8 low of 1.3760.
(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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