Canadian Dollar sits near September 16 highs as weaker USD offsets declining oil prices

USD/CAD struggles to attract any meaningful buyers and hangs near one-and-a-half-month low.
Sliding crude oil prices undermine the Loonie, while hopes for Iran diplomacy weigh on the USD.
Traders look to US ISM Manufacturing PMI ahead of Friday’s jobs reports from the US and Canada.

The USD/CAD pair struggles to capitalize on a modest intraday uptick and trades around the 1.3965 area during the early European session amid a combination of diverging forces. Crude oil prices kick off the new week on a downbeat note, which undermines the commodity-linked Loonie and supports spot prices. However, receding safe-haven demand weighs on the USD and keeps the currency pair close to its lowest level since September 16, touched on Friday.

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

Iranian negotiators reportedly held talks with Qatari mediators for the third consecutive day on Sunday to advance a deal to end the US-Israeli war on Iran. In further developments, Iran has proposed a two-day (48-hour) plan to reopen the Strait of Hormuz, provided that the US fulfills a set of conditions. Moreover, US President Donald Trump said that negotiations with Iran were going fine and that Iran wanted a deal. Adding to this, the absence of any meaningful military escalation over the weekend prompts some profit-taking around crude oil prices following the recent rally to the highest level since mid-May.

This, to a larger extent, overshadows the Bank of Canada's (BoC) abrupt shift toward monetary tightening and acts as a headwind for on the Canadian Dollar (CAD). The USD, on the other hand, is pressured by the optimism over a potential diplomatic resolution to conflicts in the Middle East. The geopolitical risk premium, however, remains in play as Trump has not ruled out further military action after the November 3 midterm elections. Moreover, Iran’s Supreme Leader, Mojtaba Khamenei, ordered his top military commanders to prepare for renewed confrontation and expand Tehran’s options for retaliation.

Oil risk skewed to the upside as Strait of Hormuz tensions linger

Analysts at MUFG/BTMU caution that, from a market perspective, “the distribution of oil risks remains asymmetric.” They acknowledge that successful diplomacy could “compress some geopolitical premium,” but warn that “renewed military escalation or further disruption around the Strait of Hormuz could generate a sharper upside move,” underscoring the vulnerability of energy importers to any fresh spike in Brent prices.

Furthermore, traders have been pricing in around a 75% chance that the US Federal Reserve (Fed) will raise borrowing costs again in December, which could act as a tailwind for the USD and offer some support to the USD/CAD pair. Market participants might also opt to move to the sidelines ahead of this week's important US macro releases scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later today. The focus, however, will be on the closely watched monthly employment details from Canada and the US, popularly known as the Nonfarm Payrolls (NFP) report on Friday.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair keeps a bearish near-term tone below the 100-day Simple Moving Average (SMA) at 1.4047. Moreover, spot prices hover around the 61.8% Fibonacci retracement at 1.3969, while the dense cluster formed by the 50.0% retracement at 1.4033 and the 100-day SMA overhead suggests rallies remain vulnerable to selling interest.

Any recovery would first need to clear the 50.0% Fibo. and the nearby 100-day SMA at 1.4047, with further resistance then expected at the 38.2% retracement around 1.4096 and the 23.6% level at 1.4175 before the cycle high near 1.4302 comes into view. On the downside, initial support sits at the 78.6% level at 1.3878 ahead of the recent swing low near 1.3763.

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

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.