USD/CAD steadies above 1.3850 as Canadian Dollar weakens on lower Oil prices
- USD/CAD steadies as weaker Oil prices, driven by US–EU tensions, weigh on global demand.
- President Trump said a 10% tariff on goods from eight European countries would take effect February 1 over Greenland.
- The Greenback may strengthen as US labor data push expectations for further Fed rate cuts to June.
USD/CAD edges higher after registering modest losses in the previous session, trading around 1.3870 during the Asian hours on Tuesday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles amid lower Oil prices, given Canada’s status as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price inches lower after two days of gains, trading around $59.30 per barrel at the time of writing. Crude oil prices edge lower as rising frictions between the United States (US) and the European Union (EU) cloud the outlook for global Oil demand.
However, the upside potential in USD/CAD may be limited as the US Dollar comes under pressure from rising uncertainty over the US–Greenland issue. US President Donald Trump said on Saturday that 10% tariff would be levied on goods from EU members Denmark, Sweden, France, Germany, the Netherlands, and Finland, as well as Britain and Norway, effective February 1, until the US is permitted to purchase Greenland. In response, European Union ambassadors agreed on Sunday to step up efforts to deter the tariffs, while also preparing retaliatory measures if the duties are implemented.
The Greenback could strengthen as US labor market data have delayed expectations for additional Federal Reserve (Fed) rate cuts until June. Fed officials have indicated limited urgency to ease policy further without clearer evidence that inflation is sustainably moving toward the 2% target. Reflecting this shift, Morgan Stanley analysts revised their 2026 outlook to one rate cut in June followed by another in September, instead of the previously expected cuts in January and April.
Canadian Dollar FAQs
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.
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.
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.
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.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
