USD/CAD rallies to monthly highs near 1.3900 in risk-off markets

USD/CAD extends gains, nearing 1.3900 on cautious markets, low Oil prices.
WTI Oil remains nearly 1% down on the week, despite Thursday's uptick.
US Dollar volatility remains subdued ahead of Friday's Nonfarm Payrolls report.

Guillermo Alcala FXStreet

The US Dollar is trading firm against its Canadian counterpart on Thursday, rallying for the fifth consecutive day, to reach a four-week high at 1.3888. A mild risk-off mood supports the safe-haven Greenback, while low Oil prices have weighed on the commodity-sensitive Canadian Dollar this week.

Prices of the benchmark WTI Oil, Canada’s main export, have picked up from Wednesday’s lows but remain nearly 1% down on the week. US President Donald Trump announced that Venezuela will deliver 30 to 50 million barrels to the US, which heightened concerns about an excess of supply in a context of softer global economic growth.

On the macroeconomic front, recent data from the US has been mixed. Employment data released on Wednesday highlighted a stalled labour market while the services sector’s activity accelerated beyond expectations, hinting at a strong economic performance in the last quarter of 2025.

Investors, however, remain wary of placing large US Dollar directional bets ahead of Friday’s Nonfarm Payrolls report, which will be analyzed carefully to assess the timing and the depth of the US Federal Reserve’s monetary easing cycle.

In Canada, the calendar was thin this week. The International Merchandise Trade figures might provide some guidance for the Loonie on Thursday, although the highlight of the week will be December’s employment report, due on Friday. Net jobs are expected to have dropped, and the Unemployment rate is seen ticking up. The risk is skewed to the downside for the CAD.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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