The USD/CAD pair fell after posting modest gains in the previous session, trading around 1.3680 during Asian hours on Tuesday. The pair faces difficulties as the commodity-linked Canadian dollar receives support from stable oil prices, given Canada’s status as the largest exporter of crude oil to the United States.
The price of WTI remains stable after posting a 1.6% gain in the previous session, trading around $57.80 at the time of writing. Crude oil prices maintain strength amid rising geopolitical risks.
Venezuela has reportedly begun shutting down wells in a key oil-producing region, as a US blockade intensifies financial pressures on the country. Uncertainty has also returned over efforts to end the war in Ukraine after alleged strikes on President Putin’s residence.
In addition, Saudi air strikes in Yemen and Iran’s declaration of a “full-scale war” with the United States, Europe and Israel have heightened fears of broader instability, while Trump has warned of further strikes if Iran resumes rebuilding its nuclear program.
Traders interpreted the Bank of Canada’s (BoC) recent calls as non-committal to further tightening, with a growing bias towards keeping interest rates steady or potentially cutting them next year, adding downward pressure on the Canadian Dollar (CAD) as expectations for additional hikes fade.
USD/CAD faces challenges as the US dollar faces challenges amid continued expectations of the Fed cutting interest rates twice more in 2026. Traders will likely focus on the minutes of the December Federal Open Market Committee (FOMC) meeting scheduled for later today.
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.
