Canadian Dollar languishes near YTD low as USD bulls keenly await US NFP report

USD/CAD remains close to a 14-month high amid a combination of supporting factors.
Oil prices hit a four-month low amid easing supply concerns, undermining the Loonie.
The BoC-Fed policy divergence favors bulls amid a firmer USD and ahead of the US NFP.

Haresh Menghani FXStreet

The USD/CAD pair consolidates above the 1.4200 mark during the Asian session on Friday as traders opt to wait for the release of the crucial US monthly employment details before positioning for any further gains. Spot prices, however, remain close to the highest level since April 2025 amid a combination of supporting factors.

Crude Oil prices have dropped to a fresh low since late February as the resumption of shipping traffic through the Strait of Hormuz eased fears of a prolonged supply shock. Adding to this, the Bank of Canada (BoC) maintained a dovish stance as policymakers are prioritizing a sluggish economy over inflation threats. This, in turn, continues to undermine the commodity-linked Canadian Dollar (CAD), which, along with a bullish US Dollar (USD), continues to act as a tailwind for the USD/CAD pair.

The US ADP report showed on Wednesday that private-sector employment increased by 98K in June, down from the previous month's unrevised 122K and missing estimates for a reading of 113K. Adding to this, the ISM Manufacturing PMI eased to 53.3 in June from 54 in the previous month. The data, however, does little to temper Federal Reserve (Fed) rate-hike bets. Moreover, lingering geopolitical risks continue to act as a tailwind for the USD, which, in turn, supports the USD/CAD pair.

In fact, Iran and the US concluded a round of indirect talks in Qatar with no sign that they have made headway toward a lasting peace agreement amid tensions over the critical Strait of Hormuz. Separately, Russia launched a barrage of missiles and drones on Ukraine’s capital, Kyiv, early this Thursday. This keeps geopolitical risks in play and favors the USD bulls. Apart from this, the divergent BoC-Fed policy expectations suggest that the path of least resistance for the USD/CAD pair is to the upside.

Traders, however, seem hesitant ahead of the US Nonfarm Payrolls (NFP) report, due later during the North American session. The closely-watched data will play a key role in influencing market expectations about the Fed's policy path and drive the USD demand. Furthermore, Oil price dynamics might continue to produce some short-term trading opportunities around the USD/CAD pair.

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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