Canadian Dollar seems vulnerable near April 2025 lows amid weak oil prices, bullish USD

USD/CAD sticks to a positive bias during the Asian session amid a combination of supporting factors.
Weak crude oil prices, the BoC’s dovish stance, and US-Canada trade tensions undermine the Loonie.
Geopolitical risks and elevated US bond yields support the USD, acting as a tailwind for spot prices.

Haresh Menghani FXStreet

The USD/CAD pair attracts some dip-buyers during the Asian session on Tuesday, stalling the previous day's modest pullback from the vicinity of the 1.4300 mark, or its highest level since April 2025. Spot prices currently trade around the 1.4265 region and seem poised to prolong a nearly one-month-old uptrend amid a combination of supporting factors.

Crude oil prices languish near a one-month low as resilient Middle Eastern crude exports and a G7 emergency stockpile release eased supply concerns. Moreover, the Bank of Canada's (BoC) predominantly dovish policy stance and US-Canada trade tensions contribute to the Canadian Dollar's (CAD) relative underperformance. This, along with the prevailing strong bullish sentiment surrounding the US Dollar (USD), continues to lend support to the USD/CAD pair and validates the near-term positive outlook.

The geopolitical risk premium remains in play amid the ongoing conflicts in the Middle East and underpins the safe-haven Greenback. In the latest developments, Yemen's Houthi group said on Monday that it carried out three military operations using ballistic and cruise missiles and drones against airports, an oil facility, and military sites across Saudi Arabia. Adding to this, media reports suggest that Israel is preparing a potential attack against Iran, either in coordination with the US or independently.

Meanwhile, US data released last week pointed to moderation in inflationary pressures, which, along with an unexpectedly weak US Nonfarm Payrolls (NFP) report, tempered expectations for a Federal Reserve (Fed) rate hike in October. Traders, however, are still pricing in over an 80% chance that the US central bank will raise borrowing costs by the year-end. Moreover, a deepening fiscal shock in France led to an extended rout in the fixed income market, keeping US bond yields elevated near multi-year highs.

The USD, however, trades below its highest level since April 2025, touched on Monday, as traders opt to wait for further cues about the Fed's policy path. Hence, the focus will remain glued to the release of FOMC Minutes on Wednesday. This, along with speeches from influential FOMC members and the incoming geopolitical headlines, will play a key role in driving the USD. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the USD/CAD pair remains to the upside.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair holds well above the 100-day Simple Moving Average (SMA) at 1.4003, extending its bullish near-term bias following last week's breakout through the 1.4245-1.4250 hurdle. However, the elevated reading of the Relative Strength Index (14) around 78 suggests overbought conditions, hinting that while upside pressure remains dominant, spot prices could be vulnerable to bouts of corrective consolidation after the recent advance.

That said, any corrective pullback could find decent support near Friday's swing low, around the 1.4200 round figure. Meanwhile, a convincing break below might prompt some technical selling and drag the USD/CAD pair to the 1.4150-1.4145 region.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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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