Canadian Dollar receives support despite lower oil prices

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USD/CAD edges lower after remaining flat in the previous day, trading around 1.3680 during the Asian hours on Thursday.

USD/CAD may rise as the oil-sensitive Canadian Dollar faces pressure from falling crude prices.
Canada’s oil sector draws renewed major interest as Middle East tensions boost its appeal to global operators.
The Greenback may recover as hawkish Fed signals and ongoing geopolitical tensions boost safe-haven demand.

USD/CAD edges lower after remaining flat in the previous day, trading around 1.3680 during the Asian hours on Thursday. However, the downside for the pair could be limited, as the commodity-linked Canadian Dollar (CAD) may face challenges amid declining oil prices, given Canada’s status as the largest crude exporter to the United States (US).

West Texas Intermediate (WTI) oil price declines after three days of gains, trading around $104.00 per troy ounce at the time of writing. However, crude oil prices could rebound amid a worsening naval blockade of Iranian ports and the United Arab Emirates’ (UAE) unexpected exit from the Organization of the Petroleum Exporting Countries (OPEC).

Canada’s oil and gas sector is attracting renewed attention from global energy majors as escalating Middle East tensions enhance the country’s appeal to leading operators. Shell’s $16.4 billion deal to acquire ARC Resources underscores this shift, while TotalEnergies and ConocoPhillips are reassessing Canadian peers alongside Equinor and BP.

The USD/CAD pair depreciates as the US Dollar (USD) edges lower after two days of gains. However, the Greenback may regain its ground as Federal Reserve policymakers struck a hawkish tone in their rate hold and persistent geopolitical tensions supported the safe-haven demand for the currency.

The Federal Open Market Committee (FOMC) voted 8-4 on Wednesday to keep interest rates unchanged within the 3.5%–3.75% range, marking the first instance of four dissenting votes since October 1992. The committee emphasized that “inflation remains elevated, partly due to the recent rise in global energy prices.”

Federal Reserve (Fed) Chair Jerome Powell remarked during the post-meeting press conference that he intends to remain on the Board of Governors for an indefinite period even after his tenure as chair concludes. Meanwhile, Kevin Warsh, nominated by Donald Trump as his successor, is widely seen as positioned to assume leadership at the central bank.

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.