The USD/CAD depreciates for the second session in a row, trading around the 1.3660 level during Asian hours on Monday. The pair remains weak near a five-month low of 1.3642, reached on December 26, as the commodity-linked Canadian dollar receives support from strong oil prices, given Canada’s status as the largest exporter of crude oil to the United States.
The price of West Texas Intermediate (WTI) crude oil rose after posting losses of 2.5% in the previous session, trading around $57.20 at the time of writing. Crude oil prices are rising amid continuing tensions in the Middle East, with Saudi air strikes in Yemen and Iran’s declaration of a “full-scale war” against the United States, Europe and Israel raising concerns about supply disruptions.
The price of the USD/CAD pair is falling as the US dollar loses strength due to the continued possibility of two additional interest rate cuts by the Federal Reserve (Fed) in 2026. Traders will likely be keeping an eye on the minutes of the December Federal Open Market Committee (FOMC) meeting scheduled for Tuesday, which may shed light on the internal policy discussions shaping the Fed’s 2026 outlook.
The Fed cut interest rates by 25 basis points at its December meeting, bringing the target range to 3.50%-3.75%. The Fed cut cumulative interest rates by 75 basis points in 2025 amid a cool labor market and still-high inflation.
The CME FedWatch tool shows an 81.7% probability of holding interest rates at the Fed’s January meeting, up from 77.9% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 18.3% from 22.1% a week ago.
Frequently asked questions about the Canadian dollar
The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
