USD/CAD remains steady after two days of gains, trading around 1.4010 in Asian hours on Monday. The pair is struggling as the Canadian dollar (CAD) gains ground on higher oil prices. It is important to note that Canada is the largest exporter of crude oil to the United States (US).
The West Texas Intermediate (WTI) oil price is holding gains around $61.00 per barrel at the time of writing. Crude oil prices rose as the Organization of the Petroleum Exporting Countries and its allies (OPEC+) signaled a pause in production increases. OPEC+ said on Sunday it planned to pause production increases in the first quarter (Q1) of 2026 after another modest rise next month.
However, the USD/CAD pair could regain ground and continue its winning streak for the third session in a row as the US dollar (USD) receives support from dampening expectations for a December rate cut by the US Federal Reserve (Fed), following the central bank’s decision to cut its benchmark interest rate for the second time this year to a range of 4.7%.
Fed Chairman Jerome Powell said during the press conference after the meeting that another rate cut in December is far from certain. Powell also warned that policymakers may need to take a wait-and-see approach until official data reporting resumes. Fed funds futures traders are now pricing in a 69% chance of a cut in December, down from 93% a week ago, according to the CME FedWatch Tool.
However, traders may exercise caution due to the extended government shutdown, which could fuel economic concerns in the United States (US). The US government impasse has now entered its sixth week with no easy end in sight amid a congressional impasse over the Republican-backed funding bill.
Frequently asked questions about the Canadian dollar
The key factors that drive the Canadian dollar (CAD) are the interest rate level set by the Bank of Canada (BoC), the price of oil, Canada’s largest export, the health of the 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 riskier 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 affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects interest rates for everyone. The main objective of the BoC is to maintain inflation at 1-3% by adjusting the interest rate up or down. Relatively higher interest rates tend to be positive for CAD. The Bank of Canada can also use quantitative easing and tightening to affect credit conditions, the former CAD negative and the latter CAD positive.
The price of oil is a key factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so the price of oil tends to have an immediate impact on the CAD value. Generally, if the price of oil rises, so does the CAD, as aggregate demand for the currency rises. 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 also supports the CAD.
While inflation has always traditionally been thought of as a negative factor for a currency as it lowers the monetary value, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure 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 can encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if the economic data is weak, the CAD is likely to fall.