Rising oil prices strengthen Canadian Dollar and push USD/CAD lower

• A rise in crude oil prices supported the Canadian Dollar, weighing on USD/CAD.
• Concerns about disruptions to energy supplies intensified after drone attacks on oil infrastructure in Saudi Arabia and Russia.
• Broader market sentiment remains sensitive to geopolitical risks and uncertainty surrounding the Fed’s interest-rate policy.

With crude oil prices rising, USD/CAD is trading near 1.4040 in Thursday’s Asian session, extending its decline to a sixth consecutive day. The oil rally strengthened the commodity-linked Canadian Dollar (CAD), leaving the pair under pressure. Crude advanced after a drone attack on Saudi Aramco’s Shaybah oil field caused two casualties, exacerbating tensions in the Middle East and fuelling concerns about possible disruptions to energy supplies.

Further complicating the regional geopolitical picture, Iranian Foreign Minister Abbas Araghchi said on Wednesday that the United States must end its naval blockade and show a genuine commitment to a diplomatic solution. Tehran stood ready to return to negotiations, Araghchi stressed, provided there was concrete evidence of a sincere American effort to secure a just and lasting end to the conflict.

This week also saw Ukraine launch large-scale drone attacks on key Russian oil infrastructure. The strikes signalled Kyiv’s intention to obstruct Moscow’s planned increase in diesel exports under a recent agreement between Presidents Trump and Putin.

Ahead of next week’s Federal Reserve (Fed) meeting, investors are also closely assessing the outlook for monetary policy. The uncertainty follows Fed Chair Kevin Warsh’s decision last week not to provide guidance on when further interest rate rises might be needed, or whether they would be necessary.

USD/CAD faces pressure as IMF forecasts point to a wider North American growth gap

The latest IMF forecasts indicate a worsening relative outlook for Canada, according to strategists at Societe Generale. They note that “with the IMF’s US growth forecast revised up to 2.5% this year (while remaining at 2.1% in 2027), the North American growth gap is widening.” Their assessment of weaker Canadian momentum is reinforced by the observation that “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, but the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada,”. Turning to monetary policy and market rates, Societe Generale also observe that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” highlighting the continuing role of relative short-dated yields in shaping the Canadian Dollar’s performance against the US Dollar.