How Are Elevated Oil Prices Supporting the Canadian Dollar?

• Selling pressure takes USD/CAD towards 1.4025 in early European trade on Thursday.
• A rate increase at next week’s BoC meeting is expected by economists.
• Prospects for progress in talks with the US remain limited, Iran indicated.

Pressure on USD/CAD pushes the pair to its lowest level since September 21, with prices around 1.4025 in Thursday’s early European session. Elevated crude oil prices support the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Later on Thursday, attention turns to the weekly US Initial Jobless Claims release, followed on Friday by Canada’s Retail Sales and the US Purchasing Managers Index (PMI) reports.

A return to rate increases could come at next week’s Bank of Canada (BoC) policy meeting, according to some economists. The central bank has kept its key interest rate steady for about a year, and an increase would mark its first hike in more than three years.

According to Reuters, swap market pricing puts the probability of a 25 basis points (bps) increase in the Canadian central bank’s benchmark rate to 2.50% on October 28 at 80%.

Deepening tensions between the US and Iran, meanwhile, drove crude oil prices sharply higher. The Financial Times reported that Iranian Foreign Minister Abbas Araqchi saw little reason to anticipate progress in discussions with Washington and said Tehran was fully prepared to defend itself.

With Canada a major oil exporter, higher crude prices generally lend support to the Loonie. Iranian President Masoud Pezeshkian said the US could not expect Tehran to enter talks while maintaining its blockade and threats against the country.

What does the IMF’s widening North American growth gap mean for USD/CAD under pressure?

A weaker Canadian outlook stands in contrast to the US growth profile in the latest IMF forecasts, according to strategists at Societe Generale. The Fund now projects US growth of “2.5% this year (while remaining at 2.1% in 2027),” highlighting an increasing divergence in North American prospects. The strategists observe that “the North American growth gap is widening,” adding that while “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, … 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 the policy and market context, Societe Generale note that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” emphasising how relative interest rate expectations influence the Canadian Dollar’s performance.

How is Warsh balancing an investment surge and AI risks with Fed policy flexibility?

A slightly less assured tone than the established baseline emerged from Fed Chair Warsh’s remarks: the FXS Speechtracker score stood at 5.6/10, below the historical average of 6.1/10, signalling moderate caution. Alongside an admission of being “over-scarred” by the Global Financial Crisis, Warsh stressed structural growth, a surge in investment and upcoming “crystalizing” meetings. Taken together, these comments point to a risk-aware approach, weighing optimism about investment and AI against downside risks and concerns over financial stability. By declining to commit in advance to October and December decisions and highlighting uncertainty over AI’s near-term effect on employment, Warsh maintained a data-dependent stance, limiting any clearly hawkish message for the Dollar.

Despite the slightly softer FXS Speechtracker score, the broader policy message stayed firmly hawkish. The FXS Fed Sentiment Index registered a rise of 0.00 points, leaving it unchanged at an elevated 127.51. Holding above 100, the index suggests markets still price in a Fed focused on price stability and alert to upside risks from investment and AI, while its near-term guidance remains deliberately non-committal.

Technical Analysis: Can USD/CAD shake off its negative bias below the 100-day SMA?

The 1.4040-1.4045 area provides immediate resistance, where the lower Bollinger band and the 100-day moving average lie. Sustained buying beyond this zone would reduce near-term downside pressure, paving the way for a move towards the Bollinger midline around 1.4190, followed by the upper band near 1.4330. 

For support, the psychological 1.4000 mark is the first key level, ahead of 1.3912, the August 31 high. A deeper decline would bring the September 8 low of 1.3760 into focus as the next support area. 

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