Canadian Dollar looks to extend recovery from YTD low on weaker USD, uptick in Oil prices

USD/CAD attracts sellers for the second straight day amid a combination of negative factors.
The softer US NFP report tempered Fed hike bets, keeping the USD bulls on the back foot.
A modest recovery in Oil prices underpins the Loonie and also exerts pressure on spot prices.

Haresh Menghani FXStreet

The USD/CAD pair struggles to capitalize on the previous day's modest bounce from a nearly two-week low and turns lower for the second straight day following a modest Asian session uptick to the 1.4200 neighborhood. Spot prices remain close to the overnight swing low, around mid-1.1400s, and seem poised to register losses for the first time in five weeks.

The US Dollar (USD) remains depressed near a two-week low, touched in reaction to softer US jobs data on Wednesday, and turns out to be a key factor exerting pressure on the USD/CAD pair. Traders trimmed their bets for interest rate hikes by the US Federal Reserve (Fed) after the closely-watched US Nonfarm Payrolls (NFP) pointed to softening labor conditions. In fact, the US economy added only 57K new jobs in June, compared to 110K consensus estimates.

Moreover, the previous month's reading was revised down from 172K to 129K, while the Unemployment Rate edged lower to 4.2% in June. This comes on top of easing inflation fears, amid the recent slump in Crude Oil prices, and tempered concerns about higher-for-longer interest rates. Traders were quick to react and shifted expectations from one to two Fed rate increases in 2026 to between zero and one hike. This, in turn, weighs on the USD and the USD/CAD pair.

Meanwhile, Iran’s military headquarters warned that any US interference in the Strait of Hormuz will be met with a “decisive and swift response.” This helps Crude Oil prices to move away from the lowest level since late February, underpinning the commodity-linked Loonie. This backs the case for an extension of the USD/CAD pair's pullback from its highest level since April 2025, set on Tuesday, though thin liquidity on the back of the US holiday warrants caution for bears.

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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