Canadian Dollar weakens against firmer USD as bears eye YTD low amid falling Oil prices
- USD/CAD regains positive traction on Wednesday amid a combination of supporting factors.
- The Iran uncertainty and Fed hike bets benefit the USD, acting as a tailwind for spot prices.
- Bearish Crude Oil prices undermine the Loonie and contribute to the intraday move higher.
The USD/CAD pair attracts fresh buyers following the previous day's modest pullback from the vicinity of mid-1.4200s, or the highest since April 2025, and maintains its bid tone through the first half of the European session on Wednesday. Spot prices currently trade around the 1.4220-1.4225 region as traders await speeches from Bank of Canada (BoC) Governor Tiff Macklem and US Federal Reserve (Fed) Chair Kevin Warsh for some meaningful impetus.
In the meantime, the divergent Fed-BoC policy expectations might continue to act as a tailwind for the USD/CAD pair. Investors expect the BoC to hold rate steady through late 2026 as policymakers are prioritizing a sluggish economy over inflation threats. In contrast, the Fed's latest projection indicates that rates could rise to 3.8% by year-end, signaling a 25-basis-point (bps) rate hike in the coming months. Apart from this, a firmer US Dollar (USD) and bearish Crude Oil prices suggest that the path of least resistance for spot prices is to the upside.
Against the backdrop of a hawkish Fed, uncertainties over US-Iran talks continue to support the USD's safe-haven status. In fact, US negotiators Jared Kushner and Steve Witkoff arrived in Qatar on Tuesday for talks about the implementation of an initial deal to end the Iran war. Tehran, however, has denied any planned meeting with US envoys, clouding the prospects for lasting peace agreement between the two countries. Furthermore, tensions over the Strait of Hormuz revive inflation fears, bolstering Fed rate hike bets and supporting the USD.
Meanwhile, Crude Oil prices have dropped to a fresh low since the start of the US-Iran war in February, which undermines the commodity-linked Loonie and further validates the near-term positive outlook for the USD/CAD pair. Hence, any corrective pullback is more likely to be bought into and remain limited. Traders on Thursday will further take cues from the US economic docket – featuring the ADP report on private-sector employment and the ISM Manufacturing PMI. The focus, however, will remain on the US Nonfarm Payrolls (NFP) report on Thursday.
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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