The USD/CAD pair remains stronger for the second session in a row, trading around the 1.3900 level during Asian business hours on Wednesday. The pair advances as the US dollar strengthens after the US Consumer Price Index (CPI) beat broad expectations, reinforcing views that the Federal Reserve (Fed) is likely to keep policy steady this month, even as underlying price pressures show signs of easing.
The US CPI rose 0.3% month-on-month in December 2025, in line with market expectations and repeating the rise seen in September. The annual inflation rate remains at an increase of 2.7%, as expected. Meanwhile, the core CPI, excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held steady at 2.6%, equivalent to a four-year low.
The data provided a clearer signal of a decline in inflation after previous releases were skewed by the effects of the lockdown. However, last Friday’s strong non-farm payrolls report, lower unemployment rate, and strong four-week average ADP employment change point to a resilient labor market.
The upside for USD/CAD could be restricted as the commodity-linked Canadian dollar may receive support from higher oil prices. The price of West Texas Intermediate (WTI) crude oil is hovering near two-month highs, trading around $60.70 per barrel at the time of writing.
Crude oil prices rose after US President Donald Trump suspended talks with Iranian officials until the protests subsided, while expressing his support for the demonstrators. The ongoing unrest in Iran, coupled with the risk of US involvement, threatens the country’s oil production of about 3.3 million barrels per day. Trump also warned that countries that continue to do business with Iran would face a new 25% tariff, raising concerns about possible supply disruptions.
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.
