Why is the Canadian Dollar weakening despite higher oil prices?

USD/JPY advances, supported by a firmer US Dollar after elevated US CPI inflation figures.
A December rate hike carries a probability of nearly 91%, according to the CME FedWatch Tool.
Higher oil prices could lend support to the commodity-linked Canadian Dollar.

A firmer US Dollar (USD) is supporting USD/CAD for a second consecutive day, with the pair trading near 1.4190 in Wednesday’s Asian session. The latest inflation report reinforced market expectations of a Federal Reserve rate hike in December, underpinning the USD’s strength. Markets now assign approximately a 91% probability to a rate increase next month, according to the CME FedWatch Tool.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October’s US Consumer Price Index increased 0.4% month-on-month, exceeding the 0.3% forecast despite moderating from September’s 0.6% rise. Excluding food and energy prices, Core CPI advanced 0.3%, in line with September’s pace but above the 0.2% estimate. Annual figures for October were not published by the Bureau of Labor Statistics because of last year’s government shutdown.

Even with these supportive inflation readings, falling safe-haven demand could weigh on the Greenback as optimism builds over a diplomatic solution to the US-Iran conflict. Further military strikes against Iran might no longer be needed, US President Donald Trump indicated. At a G7 meeting, US Secretary of State Marco Rubio also said major combat operations were no longer required. Meanwhile, Congressional Democrats are considering whether to use the approaching government funding deadline to steer the Trump administration towards a peaceful resolution.

Higher oil prices could support the commodity-linked Canadian Dollar (CAD), potentially limiting further gains in USD/CAD. After declining for two days, West Texas Intermediate (WTI) oil is recovering, trading near $85.70 per barrel at the time of writing.

Signs of reduced tensions between the US and Iran could, however, put crude oil prices under pressure. Hopes of a possible diplomatic settlement strengthened after US President Donald Trump suggested that further military strikes against Iran might no longer be necessary. Congressional Democrats, meanwhile, are weighing the upcoming government funding deadline as a means of pressing the Trump administration to end the conflict.

Chart Analysis USD/CAD — USD/CAD: What Does the Daily Chart Show?

Does Goolsbee’s ‘real inflation issue’ Warning Reinforce the Hawkish Fed Tone and Dollar Support?

A more hawkish message from the Fed’s Goolsbee pushed the FXS Speechtracker score to 8/10, considerably above its historical average of 6.8/10, highlighting increased unease over persistent price pressures. Describing the latest CPI as “borderline disturbing,” he stressed that services inflation is “not coming down” and that there is “a real inflation issue” the Fed is “going to have to deal with”. These remarks indicate a clear readiness to tighten policy further if necessary, even with the labour market characterised as “steady and stable.” Persistent concerns over inflation, alongside a resilient labour market, favour the Dollar and weaken the case for policy easing in the near term.

With a gain of 1.69 points, the FXS Fed Sentiment Index reached 145.61, confirming that the broader policy message remains decidedly hawkish and well above the neutral 100 level. Taken together with the elevated FXS Speechtracker score, the index’s rise suggests markets should factor in a higher-for-longer Fed policy path. Such an outlook typically supports the Dollar while weighing on risk-sensitive currencies.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar: Frequently Asked Questions

Which Factors Matter Most for the Canadian Dollar?

The Canadian Dollar (CAD) is primarily influenced by interest rates set by the Bank of Canada (BoC), oil prices, the strength of Canada’s economy, inflation and the trade balance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Market sentiment also plays a role: investors may favour riskier assets in a risk-on environment or seek safe havens when conditions turn risk-off. Risk-on sentiment generally supports the CAD. Since the US is Canada’s largest trading partner, the performance of the US economy is another important influence on the Canadian Dollar.

Why Do Bank of Canada Decisions Matter for the Canadian Dollar?

By setting the interest rate at which banks can lend to each other, the Bank of Canada (BoC) strongly influences the Canadian Dollar and borrowing rates across the economy. Its primary objective is to keep inflation at 1-3%, raising or lowering interest rates as needed. Relatively high rates generally support the CAD. The BoC can also alter credit conditions through quantitative easing or quantitative tightening; easing tends to weigh on the CAD, whereas tightening tends to strengthen it.

Why Is the Canadian Dollar Sensitive to Oil Prices?

As petroleum is Canada’s largest export, changes in oil prices tend to affect the Canadian Dollar’s value immediately. Rising oil prices generally lift the CAD by increasing overall demand for the currency, while falling prices usually have the reverse effect. More expensive oil also raises the likelihood of a trade surplus, providing additional support for the CAD.

Why Can Inflation Figures Move the Canadian Dollar?

Inflation was traditionally viewed as unfavourable for a currency because it erodes the value of money. With cross-border capital controls becoming less restrictive in modern times, however, the effect has often been the opposite. Higher inflation tends to prompt central banks to raise interest rates, drawing inflows from global investors looking for attractive returns on their money. Demand for the domestic currency consequently increases; in Canada, that currency is the Canadian Dollar.

What Does Economic Data Mean for the Canadian Dollar?

The Canadian Dollar can respond to macroeconomic releases because they indicate the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can all shape the CAD’s direction. Economic strength generally supports the currency by drawing more foreign investment and potentially prompting the Bank of Canada to raise interest rates, which further strengthens the currency. Weak economic readings, by contrast, are likely to weigh on the CAD.