USD/CAD gains ground above 1.4050 amid US Dollar strength, lower crude oil prices

USD/CAD strengthens to around 1.4070 in Tuesday’s Asian session.
Fed’s Powell suggested the last reduction may be the last of 2025.
Lower crude oil prices undermine the commodity-linked Canadian Dollar.

Lallalit Srijandorn FXStreet

The USD/CAD pair gains ground to near 1.4070 during the Asian trading hours on Tuesday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) as traders dial back bets for further Federal Reserve (Fed) rate cuts. Traders will keep an eye on Canada’s Merchandise Trade data and Fedspeak later on Tuesday.

The Fed lowered the target for its key lending rate by 25 basis points (bps) at its October meeting last week, putting it in a range of 3.75% to 4.0%. During the press conference, Fed Chair Jerome Powell delivered hawkish comments, saying that the labor market was "less dynamic and somewhat softer" than earlier this year.

Powell signaled that a further reduction in the policy rate at the December meeting is not a foregone conclusion. This, in turn, could lift the USD against the CAD in the near term. Traders now see only about a 70% chance of a cut in December, down from 93% a week ago, according to the CME FedWatch tool.

Meanwhile, crude oil prices fall as concerns over a looming supply glut persisted, weighing on the commodity-linked Loonie and acting as a tailwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.

The Bank of Canada (BoC) cut its benchmark rate by 25 basis points (bps) to 2.25% last week, but Governor Tiff Macklem said he would be ready to respond if Canada's economic outlook changed materially. This decision was the second cut in a row, bringing the rate down to the lowest since July 2022.

BoC’s Macklem noted that the easing was designed to help the economy deal with the disruption from US tariffs while keeping inflation close to the 2% target. The BoC will monitor incoming data closely, and the next rate decision is scheduled for December 10, 2025. Economists expect that while rate cuts have paused for now, there could be more easing in the next year.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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