The USD/CAD pair pares recent gains from the previous session, trading around 1.3710 during Asian hours on Friday. The value of the pair declines as the US dollar loses strength amid expectations of two additional interest rate cuts by the Federal Reserve in 2026.
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. Minutes from the December Federal Open Market Committee (FOMC) meeting indicated that most participants viewed it as likely appropriate to stand for further interest rate cuts if inflation declines over time. Meanwhile, some Fed officials said it may be better to leave interest rates unchanged for a while after the committee made three rate cuts in 2025 to support the weak labor market.
The Canadian Dollar (CAD) is receiving support as recent communications from the Bank of Canada (BoC) indicated no commitment to further tightening, with a growing bias towards holding interest rates. Statistics Canada reported a 0.3% contraction in real GDP in October, underscoring slowing growth momentum in the fourth quarter. S&P Global Canada’s December Manufacturing Purchasing Managers’ Index (PMI) will be followed later today.
The commodity-linked Canadian dollar is receiving support against the US dollar amid rising oil prices, given Canada’s status as the largest exporter of crude oil to the United States. Oil prices may rise on potential supply concerns amid rising geopolitical tensions.
Ukrainian drones reportedly bombed Russian oil facilities, while Russia and Ukraine accused each other of attacks on civilians on New Year’s Day, despite intense talks overseen by US President Donald Trump aimed at ending the nearly four-year-old conflict.
Reuters reported that the US Treasury Department announced on Wednesday sanctions on oil traders accused of helping Maduro’s Venezuelan government evade restrictions, including four tankers allegedly part of the so-called “shadow fleet.”
The price of West Texas Intermediate (WTI) crude oil has stabilized after posting modest losses in the previous trading session, hovering near $57.60 at the time of writing. Traders are awaiting the virtual meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) scheduled to be held on Sunday, with expectations that the group will adhere to its decision taken in November to temporarily halt further production increases.
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.
