Canadian Dollar weakens despite higher oil prices
- USD/CAD gains as market risk aversion leaves the Canadian Dollar flat, failing to capitalize on rising crude oil prices.
- WTI rises as Middle East supply fears grew after Iran fired unsuccessful ballistic missiles at Kuwait and Bahrain.
- US Dollar strengthens as the Strait of Hormuz closure raises energy prices and inflation, keeping Fed rates higher for longer.
USD/CAD edges higher after posting minor losses in the previous day, trading around 1.3850 during the Asian hours on Wednesday. The commodity-linked Canadian Dollar (CAD) fails to capitalize on rising crude oil prices as intensifying market risk aversion prompts trader caution, keeping the currency flat.
West Texas Intermediate (WTI) climbed for a third consecutive session, trading near $92.60 per barrel at the time of writing. This price surge follows a fresh escalation of hostilities in the Middle East, where Iran launched ballistic missiles toward neighboring Kuwait and Bahrain. According to ABC News, US Central Command (CENTCOM) successfully intercepted the missile and drone attacks while executing self-defense strikes on Iran’s Qeshm Island.
The threat of a prolonged closure of the Strait of Hormuz has stoked fears of a broader energy supply disruption, which could drive global inflationary pressures higher. This backdrop strongly reinforces expectations that the Federal Reserve (Fed) will maintain elevated interest rates for an extended period, supporting the US Dollar (USD). This higher-for-longer monetary outlook is heavily supported by a resilient US economy, highlighted by the May 2026 ISM Manufacturing PMI jumping to 54.0 from 52.7, beating forecasts to mark the strongest factory expansion since May 2022.
Further evidence of economic strength appeared in the labor market, where April JOLTS data showed job openings surging to a nearly two-year high of 7.61 million alongside declining layoffs. With robust manufacturing and employment data complicating the inflation outlook, investors are now anxiously awaiting Friday’s Nonfarm Payrolls report for definitive clues on the future trajectory of Fed policy.
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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