The USD/CAD pair bounced back from near the mid-1.3500s, or the one-month low seen in Monday’s Asian session, although it lacked consistent buying. Spot prices are struggling to break above 1.3600 amid mixed fundamental cues, which calls for some caution for bullish traders.
The heightened conflict in the Middle East offset Friday’s US non-farm payrolls (NFP) report, pushing the US dollar (USD) to a new high from November 2025. In addition, rising crude oil prices are fueling inflation concerns and prompting investors to continue their expectations for the possible timing of US federal rate cuts and US Treasury bond yields. This provides an additional boost to the Greenback, which in turn acts as a key factor for the USD/CAD pair as a tailwind.
Meanwhile, crude oil prices surged more than 25% on the day to hit a nine-month high above $110 on Monday amid concerns over supply cuts from the Strait of Hormuz. It appears that the Loonie is commodity based and acts as a headwind for the USD/CAD pair. Furthermore, Friday’s break below multi-week trading range support makes it wise to wait for strong buying before confirming that spot prices have formed a near-term bottom and positioning for an effective recovery.
Questions about the Canadian dollar
Key drivers of 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 balance of trade, which is the difference between the value of Canada’s exports and its imports. Other factors include market sentiment—whether investors are buying riskier assets (risk-on) or seeking safe havens (risk)—with CAD-positive risk. As its largest trading partner, the health of the US economy is also a key factor for the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the interest rate at which banks can lend to each other. This affects interest rates for everyone. The main objective of the BoK is to keep inflation at the level of 1-3% by adjusting interest rates up or down. Relatively higher interest rates are generally 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 major factor affecting the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil has an immediate effect on the value of the CAD. Generally, if the price of oil goes up, the CAD will also go up because the demand for the currency will increase. The situation is reversed if oil prices fall. Higher oil prices also lead to a more likely positive trade balance, which also supports the CAD.
Although inflation has always been seen as a negative factor for a currency because it lowers the value of money, in modern times it has actually been the opposite with the easing of cross-border capital controls. Higher inflation makes central banks tend to raise interest rates, which attracts more capital inflows from global investors looking for a profitable place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases determine the health of the economy and can affect the Canadian dollar. Indicators such as GDP, manufacturing and services PMI, employment and consumer sentiment surveys can influence CAD direction. A strong economy is good for the Canadian dollar. Not only would it attract more foreign investment, but it could encourage the Bank of Canada to set interest rates, which would lead to a stronger currency. However, if economic data is weak, the CAD is likely to decline.
