Canadian Dollar eases from one-month top vs. firmer USD; surging Oil prices limit losses
- USD/CAD attracts some buyers in the vicinity of mid-1.3500s, though it lacks follow-through.
- The global flight to safety lifts the USD to a multi-month peak and lends support to spot prices.
- Surging Crude Oil prices underpin the commodity-linked Loonie and cap the upside for the pair.
The USD/CAD pair rebounds from the vicinity of mid-1.3500s, or a nearly one-month low touched during the Asian session on Monday, though it lacks follow-through buying. Spot prices struggle to build on the bounce beyond the 1.3600 mark amid mixed fundamental cues, which warrants some caution for bullish traders.
The escalating Middle East conflict offsets Friday's dismal US Nonfarm Payrolls (NFP) report and lifts the safe-haven US Dollar (USD) to a fresh high since November 2025. Furthermore, a surge in Crude Oil prices fuel inflation concerns and forces investors to push back their expectations about the likely timing of the next rate cut by the US Federal Reserve (Fed), and continues to push the US Treasury bond yields. This provides an additional boost to the Greenback, which, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair.
Meanwhile, Crude Oil prices surged over 25% intraday, beyond the $110 mark, to a nine-month peak on Monday amid concerns about supply disruptions from the Strait of Hormuz. This is seen underpinning the commodity-linked Loonie and acting as a headwind for the USD/CAD pair. Moreover, Friday's break below a multi-week-old trading range support makes it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and before positioning for any meaningful recovery.
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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