The USD/CAD pair continues its gains for the second session in a row, trading around the 1.3750 level during the Asian hours on Monday. The pair rises as the US dollar (USD) strengthens on safe-haven demand, driven by a renewed rise in geopolitical risks following the US arrest of Venezuelan President Nicolas Maduro. US President Donald Trump said that the United States will oversee Venezuela until a safe, orderly and wise transition takes place, according to CNN.
The Guardian reported on Monday that President Trump warned that Washington could launch a new military intervention if Venezuela’s interim president, Delcy Rodriguez, fails to meet American demands. He also made statements about Colombian leadership, floated the idea of ”Operation Colombia,” criticized Mexico for not organizing its efforts, and suggested that Cuba appeared close to collapse.
Traders expect two additional interest rate cuts by the Fed in 2026. Minutes from the December Federal Open Market Committee (FOMC) meeting indicated that most participants felt it would likely be appropriate to stand for further interest rate cuts if inflation declines over time. Markets are preparing for US President Donald Trump to nominate a new Federal Reserve Chairman to replace Jerome Powell when his term ends in May, a move that could push monetary policy towards lower interest rates.
The upside for USD/CAD could be capped as the commodity-linked Canadian dollar could strengthen on the back of potential gains in oil prices. However, the price of West Texas Intermediate (WTI) crude oil remains steady after experiencing volatility, trading around $57.20 per barrel at the time of writing.
Traders weighed the ramifications of the US attack on Venezuela, with markets assessing risks to regional crude oil supplies. However, some analysts expect limited disruption, noting that Venezuela produces less than 1 million barrels per day, less than 1% of global production.
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.
