Canadian Dollar gains momentum on rising oil prices, hawkish BoC rate hike bets
- USD/CAD depreciates as soaring crude oil prices support the commodity-linked Canadian Dollar.
- US-Iran conflict resolution efforts continue, though officials dismiss reports that a final peace deal is imminent.
- Markets price in an 85% chance of a Fed rate pause as Chair Warsh maintains a neutral policy stance.
USD/CAD continues its losing streak for the fifth successive day, trading around 1.4050 during European hours on Wednesday. The commodity-linked Canadian Dollar (CAD) is gaining strength, supported by rising crude oil prices.
Energy markets advanced as traders evaluated mixed reports regarding diplomatic progress between the United States and Iran. While negotiations remain active, market sentiment faced headwinds following high-level diplomatic discussions in Tehran, where Pakistan’s army chief, Field Marshal Asim Munir, met with senior Iranian diplomatic and military leaders to discuss bilateral ties and the status of talks with Washington. A diplomat involved in the talks clarified that conflict resolution efforts are ongoing, while dismissing reports of an imminent final deal as premature.
BoC hike odds stay elevated despite easing Canada inflation
Societe Generale’s Kenneth Broux highlights a disconnect between the latest inflation data and market pricing, noting that Canadian headline inflation has ticked higher while core pressures have eased. Against that backdrop, he finds it “puzzling” that “money markets continue to price in better than 50% odds of a rate increase by the BoC at the end of the month,” even as USD/CAD remains locked in a clear downtrend and grinds toward key support levels.
Meanwhile, downside pressure on the NZD/USD currency pair could be restrained as the US Dollar (USD) holds its ground on safe-haven demand. Higher oil prices have renewed concerns over global inflation, providing underlying support to the Greenback. Financial markets are closely monitoring the Federal Reserve's monetary policy outlook. According to the CME FedWatch Tool, traders are pricing in an 85% probability that the Fed will hold interest rates steady next week, alongside an 88% chance of a rate hike in December.
Technical Analysis:
In the daily chart, USD/CAD trades at 1.4050, capped beneath the key moving averages, which keeps the near-term bias bearish despite the pair holding relatively close to recent highs. Price sits below the 50- and nine-day Exponential Moving Averages (EMAs), suggesting that rallies remain vulnerable while the short- and medium-term trend indicators stay overhead. The 14-day Relative Strength Index (RSI) at 41.7 drifts below the midline, hinting at waning bullish momentum after the previous overbought readings seen earlier in October.
On the topside, immediate resistance is located at the 50-day EMA at 1.4075, with a stronger barrier at the nine-day EMA around 1.4138, where selling pressure could re-emerge if the pair attempts a rebound. With no clear technical support levels derived from the given indicators, the focus remains on whether USD/CAD can reclaim the 50-day EMA to ease downside pressure, or instead extend its pullback as momentum stays soft and the Fed Sentiment Index consolidates near recent lows.
Warsh flags investment surge and AI focus but avoids pre-committing on policy
Fed Chair Warsh delivered a moderately constructive but cautious message, with the FXS Speechtracker score at 5.6/10, slightly softer relative to the historical average of 6.1/10. The admission of being "over-scarred from the global financial crisis" underscores a bias toward risk management and financial stability even as Warsh highlights structural growth and an investment surge driven by "good policies." Warsh’s refusal to pre-judge the October and December meetings, coupled with emphasis on AI’s uncertain near-term employment impact, points to a data-dependent stance that tempers any immediate hawkish signal for the Dollar.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 127.51, confirming that the overall policy tone remains firmly in hawkish territory despite the slightly softer FXS Speechtracker score. For FX markets, the combination of a high FXS Fed Sentiment Index and Warsh’s cautious, crisis-scarred framing suggests ongoing support for the Dollar, but without fresh hawkish escalation from this speech.
(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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