Canadian Dollar remains depressed as firmer USD and trade war counter higher oil prices
- USD/CAD attracts some buyers for the second straight day, albeit it lacks bullish conviction.
- Inflation-driven Fed hike bets and geopolitical risks act as a tailwind for the USD and the pair.
- The US-Canada trade war offsets higher oil prices and undermines the Loonie, favoring bulls.
The USD/CAD pair sticks to a positive bias for the second straight day and trades around mid-1.3800s during the Asian session on Tuesday. Spot prices, however, lack bullish conviction amid a combination of diverging forces, warranting caution before positioning for an extension of the recent recovery from a three-month low, touched last week.
Inflation risks stemming from volatile energy prices keep bets for at least one interest rate hike by the US Federal Reserve (Fed) in 2026 on the table. Apart from this, persistent geopolitical uncertainties help the safe-haven US Dollar (USD) to recover further from its lowest level since mid-May, which, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair. However, an uptick in crude oil prices could underpin the commodity-linked Loonie and cap gains for the currency pair.
The geopolitical risk premium remains in play amid escalating US-Iran tensions. Treasury Secretary Scott Bessent announced Monday that the US is launching a campaign to isolate Iran from the global economy and warned that any country conducting business with Iran risks facing US sanctions. Iran's Supreme National Security Council secretary, Mohsen Rezaei, had said that the Islamic Republic would halt all oil exports through the Strait of Hormuz if economic war continued.
This, in turn, is seen as supporting crude oil prices and the safe-haven Greenback. The Canadian Dollar (CAD), on the other hand, is pressured by concerns about a deepening US-Canada trade war. The US imposed 50% tariffs on $20bn worth of Canadian goods on Saturday after trade talks between the two countries fell apart on Friday. In response, Canadian Prime Minister Mark Carney said that the country would impose its own retaliatory tariffs beginning on September 8.
Strategists at Scotiabank report that the “abrupt collapse of US/Canada trade talks at the 11th hour on Friday has torpedoed the positive sentiment that had developed around the CAD over the past four weeks and heralds a period of more intense uncertainty about our relationship with the US.” They add that the Canadian government has promised to respond “dollar for dollar” to the latest round of US tariffs and has told provincial leaders that “another round of domestic aid will be forthcoming,” underscoring the heightened policy and trade uncertainty facing Canadian businesses.
The aforementioned fundamental backdrop backs the case for some near-term gains for the USD/CAD pair. That said, traders seem hesitant to place aggressive bullish bets on the USD and opt to wait for more cues about the Fed's further policy path. Hence, the focus will remain on the release of the US Personal Consumption Expenditures (PCE) Price Index on Wednesday and Fed Chair Kevin Warsh’s keynote address at the annual Jackson Hole Symposium on Friday.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair holds just above the 23.6% Fibonacci retracement of the June-August decline but still capped by the 200-day Exponential Moving Average (EMA). This positioning keeps the near-term bias mildly bearish, suggesting rallies are more likely to face supply than extend impulsively higher.
On the topside, initial resistance is seen at the 200-day EMA around 1.3885, followed by the 38.2% Fibo. at 1.3928 and the 50.0% retracement near 1.3988. On the downside, immediate support is provided by the 23.6% retracement at 1.3852, with a more important structural floor aligning at the Fibonacci anchor near 1.3731, where buyers would be expected to step in to defend the broader advance.
(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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