Canadian Dollar weakens despite higher oil prices

출처 Fxstreet
  • Higher crude prices from Middle East geopolitical tensions and Gulf storm disruptions could bolster the Canadian Dollar.
  • Federal Reserve hawkishness and multi-decade High Treasury yields continue to support broad US Dollar strength.
  • Markets expect steady October US rates, but traders still price in a strong probability of a December hike.

USD/CAD remains stronger for the second successive day, trading around 1.4270 during Asian hours on Thursday. However, potential gains for the pair may be capped by strength in the commodity-linked Canadian Dollar (CAD), which could draw support from rising crude oil prices. Oil prices pushed higher following reports that the Trump administration directed the Pentagon to draft strike options against Iran ahead of the midterm elections—a move that ran counter to expectations that the US would avoid escalating tensions with Tehran before the November vote.

Adding further upward pressure on energy prices, oil operations in the Gulf of Mexico were disrupted by Tropical Storm Isaias. Producers shut in over 510,000 barrels per day of crude output, cutting roughly a quarter of the region’s total production.

Canada’s political fault lines widen as separatist vote gains traction

Analysts at Rabobank highlight a notable rise in political fragmentation in Canada, pointing to the provincial election in Quebec where “the separatist Parti Québécois won around 30 percent of the vote… gaining 59 of 127 seats—just shy of a majority but enough to form a minority government.” They add that tensions are not confined to the east: “Farther west, Alberta will vote on its own independence (or at least, the process to start considering independence) from Canada on October 19,” underscoring a broader increase in political uncertainty that could bear watching for Canadian assets and the Canadian Dollar over time.

The USD/CAD pair appreciates as the US Dollar (USD) gains strong support from the Federal Open Market Committee's (FOMC) hawkish stance on persistent inflation risks. Minutes from the Federal Reserve's September meeting showed unanimous support among all 19 policymakers for the recent rate hike, with most agreeing that another increase could be necessary before year-end. While markets broadly expect interest rates to remain unchanged at the October meeting, CME's FedWatch tool indicates traders are still factoring in a 78.3% chance of a December rate hike.

Further bolstering the Greenback, US Treasury yields have rebounded near multi-decade highs not seen since 2002, with the 10-year and 30-year notes trading around 5.32% and 5.70%, respectively. Market participants are now closely monitoring upcoming speeches from key Fed officials, including Christopher Waller and Alberto Musalem, for further insight into the central bank's rate trajectory.

Schmid flags AI-driven inflation, keeps Fed firmly hawkish

Fed’s Schmid delivers a notably hawkish tone, with an FXS Speechtracker score of 8/10, modestly above the 7.5/10 historical average and underscoring a stronger-than-usual focus on inflation risks. The emphasis that the labor force “remains in a good place” alongside frustration over persistent inflation, AI as a new major inflation driver, and the need for further work on the short rate despite higher long-term yields highlights a clear commitment to restoring Fed credibility and suggests a bias toward keeping policy restrictive for longer.

The FXS Fed Sentiment Index rises by 0.34 points to 137.91, reinforcing that Fed communication remains firmly in hawkish territory well above the neutral 100 mark. The combination of an elevated index level and an above-baseline FXS Speechtracker score signals that markets should continue to price in a Fed inclined toward tighter policy, supporting the Dollar against lower-yielding peers.

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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