Canadian Dollar holds gains vs soft USD as rallying oil prices counter trade risks

USD/CAD attracts sellers for the second straight day as bullish oil prices underpin the Loonie.
The divergent Fed-BoC policy expectations could lend support to spot prices and limit losses.
Fresh US-Canada trade war fears also warrant caution before placing aggressive bearish bets.

Haresh Menghani FXStreet

The USD/CAD pair remains on the defensive below the 1.4100 mark during the Asian session on Thursday amid a combination of factors. However, the lack of follow-through selling warrants caution before confirming that this week's recovery from the 1.4000 psychological mark, or a one-month low, has run out of steam and positioning is for deeper losses.

Crude Oil prices climb to a fresh high since June 11 amid intensifying tensions in the Middle East, which has led to a significant fall in traffic through the Strait of Hormuz. Adding to this, Iran-backed Houthis in Yemen announced a blockade of Saudi ports, raising fears that disruptions to another vital shipping corridor could further restrict global oil supplies and lending additional support to the black liquid. This is seen underpinning the commodity-linked Loonie, which, along with a softer US Dollar (USD), acts as a headwind for the USD/CAD pair.

Meanwhile, elevated crude oil prices continue to fuel inflationary concerns, bolstering expectations for an interest rate hike by the US Federal Reserve (Fed). According to the CME Group's FedWatch Tool, traders are pricing in over a 90% chance that the US central bank will raise borrowing costs by the end of this year. The outlook lifts US Treasury bond yields to a multi-month high and supports the Greenback. Moreover, bets that the Bank of Canada (BoC) will keep rates unchanged through the remainder of 2026 help limit losses for the USD/CAD pair.

Apart from this, US President Donald Trump's recently announced 50% tariff on Canadian goods might hold back traders from placing aggressive bullish bets on the Canadian Dollar (CAD). Moving ahead, Thursday's economic docket features the release of monthly Canadian Retail Sales figures and Weekly Initial Jobless Claims data from the US. Apart from this, incoming geopolitical headlines and trade-related developments should contribute to producing short-term trading opportunities around the USD/CAD pair amid mixed fundamental cues.

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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