September 16 high in focus: Canadian Dollar holds firm near peak against weak USD amid bullish oil prices

Third consecutive day of declines for USD/CAD as several headwinds combine.
Lower US bond yields and prospects for Middle East diplomacy put the safe-haven USD under pressure.
Oil price strength and a hawkish turn by the BoC support the Loonie, adding to USD/CAD’s losses.

USD/CAD traded near the mid-1.3900s. Selling continued for a third consecutive day during Friday’s Asian session, taking the pair to its lowest level since 16 September as the US Dollar (USD) weakened broadly. Spot prices subsequently edged a few pips higher from that area. A modest retreat in crude oil limited gains in the commodity-linked Loonie, though USD/CAD remained on course for a third consecutive weekly decline.

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

Hopes of a diplomatic end to the Middle East conflicts, alongside a sharp drop 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 revive peace talks. Qatar also put forward a new draft peace agreement to Iran. Separately, disappointing technology earnings prompted investors to seek safety in government bonds, amid concerns that growing AI expenditure may fail to generate sufficient returns. These developments are weighing on both the dollar and USD/CAD.

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

Elevated crude oil prices also pose inflation risks, supporting expectations of further Fed policy tightening. For the Canadian Dollar (USD), however, downside appears constrained by the Bank of Canada's (BoC) abrupt turn towards monetary tightening. The shift followed its first interest rate increase since July 2023 earlier on Wednesday. This may deter traders from taking bullish USD/CAD positions, suggesting caution before positioning for a substantial rebound. Attention now turns to Canada’s monthly GDP release and speeches by influential FOMC members for fresh direction.

USD/CAD: 4-hour chart

Technical Outlook

A break below the psychological 1.4000 level, followed by sustained trading beneath it, leaves USD/CAD with a bearish near-term outlook. On the 4-hour chart, spot prices also sit well below the 200-period Simple Moving Average (SMA). Rallies are therefore likely to remain limited while 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: Frequently Asked Questions

Which factors shape the Canadian Dollar’s performance?

Interest rates set by the Bank of Canada (BoC), Oil prices, economic conditions, inflation and the Trade Balance are the principal drivers of the Canadian Dollar (CAD). Oil is Canada’s largest export, while the Trade Balance measures the difference between the value of its exports and imports. Investor sentiment also matters: demand for riskier assets (risk-on) generally supports CAD, whereas a preference for safe havens signals risk-off conditions. The strength of the US economy is another major influence, as the US is Canada’s largest trading partner.

How does Bank of Canada policy affect the Canadian Dollar?

By determining the interest rate at which banks lend to each other, the Bank of Canada (BoC) influences borrowing rates throughout the economy and, in turn, the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Higher rates relative to those elsewhere generally support CAD. The BoC can also alter credit conditions through quantitative easing or tightening. Easing tends to weigh on CAD, while tightening tends to strengthen it.

Why do Oil prices matter for the Canadian Dollar?

As petroleum is Canada’s largest export, changes in Oil prices typically feed through quickly to the Canadian Dollar’s value. Rising Oil prices generally lift CAD by increasing overall demand for the currency; falling prices usually have the reverse effect. More expensive Oil also tends to increase the likelihood of a trade surplus, providing further support for CAD.

How does the Canadian Dollar respond to inflation data?

Inflation was traditionally regarded as harmful to a currency because it erodes the value of money. With cross-border capital controls now more relaxed, however, the relationship has reversed in modern times. Higher inflation typically prompts central banks to raise interest rates. Those higher returns attract capital from international investors, boosting demand for the domestic currency, which in Canada is the Canadian Dollar.

What role do economic releases play in Canadian Dollar movements?

GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys all help assess economic health and can influence the direction of the Canadian Dollar. A robust economy supports CAD by drawing foreign investment and potentially prompting the Bank of Canada to raise interest rates, strengthening the currency further. Conversely, weak economic releases are likely to put CAD under pressure.