USD/CAD falls to near 1.3900 as Canadian Dollar gains on higher Oil prices

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USD/CAD halts its four-day winning streak, trading around 1.3900 during the Asian hour on Monday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support from higher Oil prices, given Canada’s status as the largest crude exporter to the United States (US).

USD/CAD weakens as higher Oil prices support the commodity-linked Canadian Dollar.
WTI price gains as China’s industrial production rose 5.2% YoY in December.
Stronger US labor market data have delayed expectations for further Fed rate cuts until June.

West Texas Intermediate (WTI) Oil price extends its gains for the second successive session, trading around $59.40 per barrel at the time of writing. Crude Oil prices appreciate following China’s key economic data.

Data from the National Bureau of Statistics showed that China’s industrial production rose 5.2% year-over-year YoY in December, accelerating from 4.8% in November, supported by resilient export-driven manufacturing activity. China’s GDP expanded 1.2% QoQ in Q4 2025, up from 1.1% in Q3 and above the 1.0% consensus. On a YoY basis, growth eased to 4.5% from 4.8% but exceeded expectations of 4.4%.

However, the upside in Oil prices may remain capped as easing tensions with Iran have reduced concerns over potential supply disruptions. Market anxiety subsided after US President Donald Trump signaled last week that he may delay any military action, following Iran’s pledge not to carry out executions of protesters. However, Trump warned that forceful measures could still be taken if executions resume, leaving some geopolitical risk premium priced into the market.

The USD/CAD pair may regain its ground as the US Dollar (USD) could appreciate against its major peers, as stronger US labor market data has pushed back expectations for further Federal Reserve (Fed) rate cuts until June. Fed officials have signaled little urgency to ease policy further until there is clearer evidence that inflation is sustainably moving toward the 2% target.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving 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 taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

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