Canadian Dollar falls as Oil prices weaken on oversupply concerns
- Canadian Dollar extends its losing streak amid persistent oversupply concerns in Crude Oil.
- OPEC+ is considering resuming output hikes in April after a three-month pause ahead of summer demand.
- Traders await Fed Meeting Minutes, Q4 GDP, and core PCE data for clearer policy direction.
USD/CAD continues its winning streak for the fifth consecutive day, trading around 1.3650 during the European hours on Tuesday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) faces challenges, as Crude Oil prices may remain under pressure due to oversupply concerns. West Texas Intermediate (WTI) Oil price remains subdued after registering over 1.5% gains in the previous session, trading around $63.20 at the time of writing.
Reuters reported that OPEC+ (Organization of the Petroleum Exporting Countries and allies) is leaning toward resuming output increases from April after a three-month pause, in preparation for peak summer demand. However, Oil prices may regain ground amid mounting supply risks as tensions escalated after Tehran conducted maritime drills in the Strait of Hormuz, which accounts for roughly 20% of global Oil shipments, ahead of renewed US-Iran nuclear talks in Geneva.
The USD/CAD pair receives support as the US Dollar (USD) steadies, as traders adopt caution ahead of the looming Federal Open Market Committee (FOMC) Meeting Minutes due on Wednesday. Focus will be shifted toward Q4 Gross Domestic Product Annualized and the core Personal Consumption Expenditures - Price Index data due on Friday for clearer signals on the policy outlook.
However, the Greenback may face challenges as softer January US Consumer Price Index (CPI) data, along with a stabilizing labor market in January, reinforced expectations that the Federal Reserve (Fed) may begin cutting rates later this year. However, sentiment remains guarded as the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, continues to hover closer to 3% than its 2% target, with disinflation progress uneven since mid-2025.
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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