The USD/CAD pair maintains its strength after recording moderate gains in the previous two consecutive sessions, trading around 1.3760 during Asian hours on Tuesday. The pair is showing limited movement as the US Dollar (USD) declines, as concerns about broader geopolitical escalation subside. Markets have largely ignored tensions between the US and Venezuela.
The United States launched a large-scale military strike against Venezuela on Saturday. US President Donald Trump said that Venezuelan President Nicolas Maduro and his wife were arrested and flown out of the country. Maduro on Monday pleaded not guilty to charges brought against him by the United States in a terrorism and drug case, paving the way for an unprecedented legal battle with major geopolitical implications, according to Bloomberg.
The US ISM Manufacturing Purchasing Managers’ Index (PMI) fell for the third straight month, falling to 47.9 in December 2025, the lowest since October 2024, from 48.2 in November and below expectations of 48.3. The data indicates a faster contraction in manufacturing activity in the United States, driven by lower production and inventories. Meanwhile, the employment index rose to 44.9 from 44.0 in November, while the prices paid index, a measure of inflation, remained unchanged at 58.5.
Traders are awaiting a series of key US economic releases this week, including the Non-Farm Payrolls (NFP) report, for signals on the outlook for monetary policy. The consensus forecast is for nonfarm payrolls to rise by 55,000.
The commodity-linked Canadian dollar may come under pressure as expectations of renewed U.S. and corporate access to Venezuela’s vast crude oil reserves weigh on the outlook for demand for Canadian oil from its largest buyer.
In addition, speculation about future Venezuelan production and a muted initial price response have heightened concerns that a continued decline in oil prices would undermine a key pillar of Canada’s external earnings and support for the currency. Meanwhile, the global oil outlook through 2026 looks softer, with abundant supply and weak demand forecasts reducing the downside cushion for the Canadian dollar.
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.
