Weak USD and Bullish Oil Prices Accompany Canadian Dollar’s Firm Stance Near September 16 High

USD/CAD remains under pressure for a third consecutive day as several adverse factors combine.
The safe-haven USD loses ground as US bond yields fall and hopes rise for diplomacy in the Middle East.
Strength in oil prices and a hawkish turn by the BoC support the Loonie, adding to pressure on the pair.

Selling pressure persists in USD/CAD as broad US Dollar (USD) weakness pushes the pair to its lowest level since September 16 in Friday’s Asian session. This marks the third consecutive day of selling. A mild retreat in crude oil prices limits gains in the commodity-linked Loonie, however, allowing spot prices to regain a few pips from around the mid-1.3900s. Even so, the pair is heading for a third successive weekly decline.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Hopes of a diplomatic settlement to end the conflicts in the Middle East, alongside a sharp fall in US bond yields, have extended the USD’s corrective decline into a third consecutive day. US Vice President JD Vance sent a letter directly to Mohsen Rezaei, secretary of Iran's Supreme National Security Council, seeking to resume peace talks. Qatar also put forward a new draft peace agreement to Iran. Separately, disappointing tech earnings prompted investors to seek the safety of government bonds, amid worries that growing AI expenditure may fail to generate adequate returns. Together, these developments put pressure on the dollar and USD/CAD.

Caution nevertheless persists among investors as hostilities intensify between Saudi Arabia and the Iran-backed Houthi group. The geopolitical risk premium also remains in place, with the US and Israel threatening to resume attacks after the US midterm elections. At the same time, expectations of a hawkish Federal Reserve (Fed) are drawing some buyers to the safe-haven USD near its weekly low. Markets appear convinced that the US central bank will increase borrowing costs in December. Thursday’s US macroeconomic releases reinforced those bets, signalling continued economic resilience and stubborn price pressures.

Elevated crude oil prices pose an additional inflation risk, reinforcing the prospect of further monetary tightening by the Fed. Meanwhile, the Canadian Dollar (USD) appears to have limited room to decline following the Bank of Canada's (BoC) sudden turn towards tighter monetary policy, marked by its first interest rate increase since July 2023 earlier on Wednesday. This could discourage traders from taking bullish positions in USD/CAD, suggesting caution before positioning for a substantial recovery. The next cues will come from Canada’s monthly GDP report and speeches by influential FOMC members.

USD/CAD: A 4-hour chart view

Can USD/CAD Recover Below Key Technical Barriers?

A near-term bearish outlook remains in place for USD/CAD after its recent break below the psychological 1.4000 level and subsequent acceptance beneath it. On the 4-hour chart, spot prices also trade well below the 200-period Simple Moving Average (SMA). This suggests that attempts to rally are likely to face limits as long as the pair consolidates below this structural barrier.

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

Canadian Dollar: Common Questions Answered

Which factors matter most for the Canadian Dollar?

The Canadian Dollar (CAD) responds primarily to interest rates set by the Bank of Canada (BoC), oil prices, economic conditions in Canada, inflation and the trade balance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor sentiment matters too: a willingness to buy riskier assets (risk-on) generally supports the CAD, whereas a preference for safe-haven assets reflects risk-off conditions. Economic conditions in the US are another major influence on the Canadian Dollar, given that the US is Canada’s biggest trading partner.

How do Bank of Canada policy decisions affect the Canadian Dollar?

By determining the interest rate at which banks can lend to each other, the Bank of Canada (BoC) has considerable influence over the Canadian Dollar. That rate, in turn, affects borrowing rates across the economy. The BoC’s primary objective is to keep inflation within 1-3%, raising or lowering interest rates to achieve this. Higher interest rates relative to those elsewhere generally support the CAD. The central bank can also alter credit conditions through quantitative easing or quantitative tightening: easing tends to weaken the CAD, while tightening tends to strengthen it.

Why are Oil prices important for the Canadian Dollar?

Canada’s reliance on petroleum as its largest export means that changes in oil prices often have an immediate effect on the Canadian Dollar. Rising oil prices generally lift the CAD by increasing overall demand for the currency; falling prices usually have the reverse effect. Costlier oil also makes a positive trade balance more likely, providing further support to the CAD.

What effect do inflation figures have on the Canadian Dollar?

The easing of restrictions on cross-border capital flows has changed how inflation affects currencies. Traditionally, inflation was regarded as negative because it erodes the value of money, but the relationship has reversed in modern times. When inflation rises, central banks tend to increase interest rates, drawing in capital from global investors seeking attractive returns. Those inflows raise demand for the domestic currency, which, in Canada, is the Canadian Dollar.

Why do economic releases matter for the Canadian Dollar?

The Canadian Dollar can react to macroeconomic releases because these provide a measure of the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all help determine the CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially prompting the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on the CAD.