- USD/CAD faces challenges as the commodity-linked Canadian dollar finds support from stable Oil prices.
- Venezuela shut Oil wells amid a US blockade, while Ukraine peace efforts faltered after alleged strikes on Putin’s residence.
- FOMC December Meeting Minutes will be eyed on Tuesday for insight into the Fed’s 2026 outlook.
USD/CAD edges lower after registering modest gains in the previous session, trading around 1.3680 during the Asian hours on Tuesday. The pair struggles as the commodity-linked Canadian Dollar (CAD) receives support from stable Oil prices, given Canada’s status of the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price remains stable after registering 1.6% gains in the previous session, trading around $57.80 at the time of writing. Crude Oil prices hold ground amid heightened geopolitical risks.
Venezuela reportedly began shutting wells in a major Oil-producing region as a US blockade intensified financial pressure on the country. Uncertainty also returned over efforts to end the war in Ukraine after alleged strikes on President Putin’s residence.
Additionally, Saudi air strikes in Yemen and Iran’s declaration of a “full-scale war” with the United States (US), Europe, and Israel have heightened fears of wider instability, while Trump warned of further strikes if Iran resumes rebuilding its nuclear programme.
Traders interpreted recent Bank of Canada (BoC) communications as noncommittal on further tightening, with a growing bias toward holding rates steady or potentially cutting next year, adding to downward pressure on the Canadian dollar (CAD) as expectations for additional hikes fade.
The USD/CAD pair struggles as the US Dollar (USD) faces challenges amid ongoing expectations of two more rate cuts by the Federal Reserve (Fed) in 2026. Traders are likely to focus on the Federal Open Market Committee (FOMC) December Meeting Minutes due later in the day.
Canadian Dollar FAQs
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.
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.
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.
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.
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.
