Canadian Dollar softens amid subdued Oil prices and a firm US Dollar
- The Canadian Dollar softens as subdued Oil prices and a firm US Dollar weigh on the Loonie.
- US PMI data point to slower growth momentum at the end of 2025.
- Focus shifts to US NFP and Canada jobs data for clues on the Fed and BoC policy outlook.
The Canadian Dollar (CAD) softens against the US Dollar (USD) on Tuesday, with USD/CAD holding an upward bias as the Greenback holds firm despite cautious Federal Reserve (Fed) commentary and softer US S&P Global Purchasing Managers Index (PMI) data.
At the time of writing, USD/CAD is trading around 1.3780. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of currencies, is hovering around 98.57 after hitting a daily low of 98.16.
The US service sector continued to expand at the end of 2025, though at a slower pace, according to the latest PMI survey from S&P Global. The Services PMI slipped to 52.5 in December from 54.1 in November, and was revised lower from the preliminary estimate of 52.9, signalling that growth slowed to its weakest pace in around eight months.
Composite PMI fell to 52.7 in December from 54.2 in November, reflecting slower growth in both the manufacturing and services sectors. S&P Global noted that new order volumes rose only marginally, marking their weakest expansion in around twenty months.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that “business activity continued to expand in December, rounding off another quarter of robust growth, but the resilience of the US economy is showing signs of cracking.” He added that “however, there is an expectation among many companies that lower interest rates and government policy will start to boost demand again as the new year proceeds."
On the monetary policy front, Fed officials struck a cautious but slightly dovish tone on Tuesday. Richmond Fed President Thomas Barkin said both sides of the Fed’s dual mandate “bear watching,” noting that the current policy rate is within the range of neutral and that upcoming decisions will need to be “finely tuned” given risks to both inflation and employment.
Separately, Fed Governor Stephen Miran said he expects incoming data to continue signaling that rate cuts are appropriate, warning that keeping policy too tight could “nip growth in the bud,” while adding that he remains optimistic about the broader economic outlook.
On the Canadian side, a light domestic economic calendar and subdued Oil prices are offering little support to the Loonie. West Texas Intermediate (WTI) trades near $58.00, struggling to build on the previous day's gains as investors continue to assess the implications of the US military intervention in Venezuela and the outlook for Venezuelan Crude exports.
Looking ahead, market attention is now firmly on the upcoming US Nonfarm Payrolls (NFP) report and Canada’s labour market data, both due on Friday. The releases are expected to play a key role in shaping expectations around the policy outlook for the Fed and the Bank of Canada (BoC) in the months ahead.
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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