Canadian Dollar gains on higher oil prices, weaker US Dollar
- USD/CAD falls as rising oil prices provided strong support for the commodity-linked Canadian Dollar.
- Crude oil prices surged as Middle East tensions escalated amid stalled negotiations between the United States and Iran.
- Fed Meeting Minutes showed officials favored raising rates soon if inflation persists, after holding the 3.5%–3.75% target steady.
USD/CAD extends its losses for the second successive day, trading around 1.3800 during the Asian hours on Thursday. The pair declines as the commodity-linked Canadian Dollar (CAD) receives support from improved oil prices.
Crude oil prices have surged amid escalating Middle East tensions as negotiations between the United States and Iran remain stalled. The confrontation has expanded to the critical Strait of Hormuz waterway, though US President Donald Trump noted that oil shipments are still moving through the passage while leaving the door open for future negotiations with Tehran.
Iran tensions keep Brent risk premium elevated
According to TD Securities, the geopolitical backdrop remains a key driver for crude, with the bank warning that the "Iran conflict teeters on further escalation." Against this setting of heightened regional risk and the potential for supply disruptions, TD Securities argues that Brent’s risk premium is likely to stay supported as market participants continue to factor in the possibility of further instability.
The USD/CAD pair loses ground as the US Dollar (USD) declines due to recent economic data and Federal Reserve (Fed) policy expectations. Minutes from the Fed's July meeting revealed that officials favored raising interest rates soon if inflation failed to cool, having kept the benchmark rate steady at 3.5%–3.75%.
While inflation indicators remain above the 2% target, recent monthly data points to modest price pressures, softening the case for aggressive tightening. These signs of cooling inflation have driven down expectations for an imminent rate increase. According to the CME FedWatch Tool, markets are now pricing in just a 32.7% probability of a Fed rate hike at the next meeting, down from 47% a month ago.
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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