USD/CAD holds above 1.3860 despite generalised US Dollar weakness

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The US Dollar is trading lower across the board, weighed by fresh concerns about the US Federal Reserve’s (Fed) independence.

USD/CAD reversal from 1.3915 highs holds above 1.3860.
The Canadian Dollar is failing to draw significant support from the US Dollar's weakness.
A moderate pullback in Oil prices is adding pressure on the Loonie.

The US Dollar is trading lower across the board, weighed by fresh concerns about the US Federal Reserve’s (Fed) independence. The USD/CAD reversal, however, has remained limited, with downside attempts held above 1.3860 so far, which keeps the bullish trend from December lows intact.

A New York Times report stating that the US Government initiated a criminal probe against Fed President Jerome Powell resurfaced concerns about the ability of the US central bank to act independently, and sent the US Dollar lower against its main peers during Monday's Asian session.

Fed president Jerome Powell echoed those worries in a video statement released shortly after the news, where he observed that these actions are “unprecedented” and a part of a broader US government campaign aimed at bending the central bank’s arm into lowering borrowing costs.

Oil prices remain close to long-term lows

A mild pullback in Oil prices is also weighing on the Canadian Dollar’s recovery. The US benchmark WTI Oil dropped about $1 to $58.60 from session highs at $59.60 earlier on the day. Crude prices, Canada’s main export, have appreciated about 2% from January 1 but remain 23% below their June 2025 peak.

On the macroeconomic front, US data was fairly positive on Friday. The unemployment rate dropped beyond expectations, while the Michigan Consumer Sentiment Index improved, easing pressure on the Fed to cut interest rates immediately.

In Canada, December’s employment data was mixed. Net employment increased by 8,2K against expectations of a 5K decline, but the jobless rate rose to 6.8% from 6.5% surpassing the market consensus of a milder rise, to 6.6%.

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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