Canadian Dollar languishes near five-week low vs USD as focus shifts to FOMC Minutes

USD/CAD regains positive traction following the overnight pullback from over a one-month high.
Geopolitical uncertainties, rising Fed rate hike bets, and elevated US bond yields underpin the USD.
Bullish Crude Oil prices could limit losses for the Loonie and cap the pair ahead of FOMC Minutes.

Haresh Menghani FXStreet

The USD/CAD pair attracts some dip-buyers during the Asian session on Wednesday, stalling the previous day's late pullback from the 1.3775 region or the highest since mid-April. Spot prices currently trade just above mid-1.3700s and continue to draw support from a bullish US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to a fresh high since April 7 on Tuesday amid persistent geopolitical uncertainties and hawkish US Federal Reserve (Fed) expectations. US President Donald Trump delayed a planned attack on Iran following a request from three Gulf leaders, though he said that the US may need to strike Iran again.

Moreover, peace talks remain stalled amid major disagreements over Tehran's nuclear program and the critical Strait of Hormuz. This keeps geopolitical risks in play and continues to benefit the safe-haven USD. Meanwhile, the US-Iran standoff keeps Crude Oil prices close to the monthly peak, fueling inflationary concerns and reaffirming bets for an interest rate hike by the US central bank.

According to the CME Group's FedWatch Tool, traders are now pricing in over a 55% chance that the Fed will raise borrowing costs by at least 25 basis points (bps) in 2026. The outlook remains supportive of elevated US Treasury bond yields, which turns out to be another factor supporting the buck and the USD/CAD pair. The USD bulls, however, seem hesitant ahead of FOMC Minutes.

In the meantime, bullish Crude Oil prices counter Tuesday's softer-than-expected Canadian consumer inflation figures and could limit deeper losses for the commodity-linked Loonie. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD is to the upside, suggesting that any corrective fall in the USD/CAD pair is more likely to be bought into.

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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