- USD/CAD is rising again as oil price decline adds pressure on the loonie, but there's much more that could define its trajectory.
The USD/CAD has been going up for the last three days, getting close to the 1.4050–1.4065 range again. The main reason the Canadian dollar weakened recently was a big drop in global oil prices, but the connection between the US and Canadian economies is about more than just energy.
What Is Driving USD/CAD Momentum?
As a major net exporter of crude oil, Canada’s currency is heavily tied to global energy benchmarks. With West Texas Intermediate (WTI) and Brent crude experiencing downward pressure amid global demand concerns, reduced energy export revenues directly diminish CAD sentiment.
Market analysis suggests that the pair’s momentum reflects a broader consolidation pattern. This pattern is influenced by differing economic performance between the U.S. and Canada.
While U.S. consumer spending and service sector indicators have shown continued underlying strength, Canada’s domestic economy is experiencing tighter credit conditions for consumers and slower job market growth.
Weak U.S. economic data and diminishing expectations of immediate interest rate hikes by the Federal Reserve have limited further appreciation of the USD/CAD. This has resulted in a steady but not rapid upward trend for the pair, currently around the 1.4080 level.
Traders are paying close attention to the upcoming US employment and services data. If this data confirms continued strength in the US economy, it could lead to a bigger difference in monetary policy. On the other hand, rising oil prices or a general market optimism would benefit the Canadian dollar. Global political news could also quickly reverse oil’s recent decline.
Interest Rates, Hold Sway
Monetary policy differences have been a more consistent influence than oil prices in recent months. The Federal Reserve has maintained a higher interest rate policy compared to the Bank of Canada, which has increased demand for U.S. assets and put downward pressure on the Canadian dollar.
The difference in yields continues to favor the U.S. dollar, and markets are still evaluating the likelihood of further tightening by the Fed against potential adjustments to Canadian interest rates.
Trade relationships also play a role. New U.S. tariffs on certain Canadian goods and the ongoing status of the CUSMA trade agreement create uncertainty for Canadian exporters. Canada’s recent trade surplus has been partly due to a weaker currency and energy exports, but sustained tariff pressure or a slowdown in U.S. demand could diminish these benefits.
Near-Term and Medium-Term Outlook
In the short term, market attention will remain highly focused on weekly crude oil inventory reports and key economic data releases from both countries, including U.S. non-farm payrolls and Canadian employment figures.
Looking further ahead, the direction of monetary policy will be the primary driver. The Bank of Canada has adopted a cautious stance on domestic growth, leaving room for potential interest rate adjustments if economic momentum slows.
In contrast, market expectations regarding the Federal Reserve’s interest rate path suggest that U.S. yields may remain relatively elevated for an extended period. This ongoing difference in yields supports the U.S. Dollar, making significant pullbacks in USD/CAD unlikely without a substantial recovery in commodity prices.
Because crude oil is Canada’s primary export, declining oil prices reduce export revenues, dampening demand for the Canadian currency.
Higher relative U.S. interest rates create favorable yield spreads for the greenback, capping potential Canadian dollar strength over coming months.
New U.S. tariffs and uncertainty around the CUSMA agreement could weigh on Canadian exports, potentially supporting USD/CAD if unresolved in the coming months.