Canadian Dollar hangs near April 2025 lows vs USD amid bearish oil, BoC-Fed divergence

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USD/CAD regains positive traction during the Asian session amid a combination of supporting factors.
The optimism over an interim US-Iran peace deal keeps Oil prices depressed, undermining the Loonie.
The divergent BoC-Fed policy expectations further support spot prices amid a broadly firmer US Dollar.

The USD/CAD pair attracts some dip-buyers following the previous day's modest pullback from its highest level since April 2025 and trades around the 1.4165-1.4170 region during the Asian session on Tuesday. Crude Oil prices remain depressed amid progress in US-Iran peace talks, undermining the commodity-linked Loonie. The US Dollar (USD), on the other hand, stands firm near a one-year high and further acts as a tailwind for the currency pair.

The US Treasury Department announced a temporary easing of sanctions on Iranian crude exports, keeping the benchmark US Crude Oil prices – West Texas Intermediate (WTI) – within striking distance of the lowest level since March, set last Thursday. This overshadows hot Canadian consumer inflation figures released on Monday and continues to weigh on the Canadian Dollar (CAD). In fact, Statistics Canada reported that the annual inflation rate accelerated to 3.2%, a 29-month high in May, moving outside the Bank of ? Canada's (BoC) 1%-3% target range.

The data, however, might do little to alter the BoC's dovish policy stance as policymakers are prioritizing a sluggish economy over inflation threats. This marks a significant divergence in comparison to the US Federal Reserve's (Fed) signal that policy rates could rise to 3.8% by year-end, implying a 25-basis-point (bps) rate hike in the coming months. Furthermore, investors remain skeptical about the sustainability of the US-Iran peace deal, which further benefits the Greenback's safe-haven status and turns out to be another factor lending support to the USD/CAD pair.

Traders now look forward to BoC Governor Tiff Macklem's scheduled speech later during the North American session for some impetus. Apart from this, the release of the flash US PMIs should contribute to producing short-term trading opportunities. The market focus, however, will remain glued to further developments surrounding the Middle East crisis, which might continue to infuse volatility in the financial markets. Nevertheless, the fundamental backdrop favors the USD bulls and suggests that the path of least resistance for the currency pair remains to the upside.

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.