Near 16 September highs: Canadian Dollar supported as USD weakness offsets falling oil prices

One-and-a-half-month lows remain in sight for USD/CAD. Meaningful buying interest remains absent.
Lower crude oil prices pressure the Loonie, but optimism over Iran diplomacy also weakens the USD.
US ISM Manufacturing PMI is the next focus before Friday’s US and Canadian employment reports.

USD/CAD trades near 1.3965. During the early European session, conflicting drivers leave the pair unable to build on a modest intraday rise. Crude oil has started the week lower, weighing on the commodity-linked Loonie and lending support to the pair. Yet softer demand for safe havens is dragging on the USD, leaving USD/CAD near Friday’s low, its weakest level since 16 September.

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

Talks between Iranian negotiators and Qatari mediators reportedly continued on Sunday for a third consecutive day, seeking progress towards an agreement to end the US-Israeli war on Iran. Iran has also put forward a two-day (48-hour) plan to reopen the Strait of Hormuz, conditional on the US meeting a set of requirements. US President Donald Trump said negotiations with Iran were going well and that Iran wanted an agreement. With no significant military escalation over the weekend, these developments have encouraged some profit-taking in crude oil following its recent climb to the highest level since mid-May.

The resulting pressure on the Canadian Dollar (CAD) largely outweighs the impact of the Bank of Canada's (BoC) abrupt turn towards monetary tightening. Meanwhile, hopes of a diplomatic settlement to the Middle East conflicts are weighing on the USD. A geopolitical risk premium nevertheless persists: Trump has not excluded further military action after the 3 November midterm elections. Iran’s Supreme Leader, Mojtaba Khamenei, has also instructed his top military commanders to prepare for another confrontation and broaden Tehran’s retaliation options.

Strait of Hormuz tensions keep oil risks tilted higher

From a market perspective, MUFG/BTMU analysts caution that “the distribution of oil risks remains asymmetric.” While successful diplomacy could “compress some geopolitical premium,” they warn that “renewed military escalation or further disruption around the Strait of Hormuz could generate a sharper upside move,” highlighting energy importers’ exposure to another surge in Brent prices.

Traders are also assigning around a 75% probability to another increase in borrowing costs by the US Federal Reserve (Fed) in December. That prospect could bolster the USD and provide some support for USD/CAD. With a new month bringing important US economic releases this week, market participants may prefer to stay on the sidelines. The schedule begins with today’s ISM Manufacturing PMI, although attention will centre on Friday’s closely followed monthly jobs figures from Canada and the US, with the latter known as the Nonfarm Payrolls (NFP) report.

USD/CAD: daily price chart

Technical Outlook

Below the 100-day Simple Moving Average (SMA) at 1.4047, USD/CAD retains a bearish short-term bias. The pair is trading close to the 61.8% Fibonacci retracement at 1.3969. Overhead, the 50.0% retracement at 1.4033 and the 100-day SMA form a tight resistance cluster, leaving rebounds exposed to selling pressure.

For a recovery to develop, the pair would first have to overcome the 50.0% Fibonacci retracement and the nearby 100-day SMA at 1.4047. Resistance would then be expected at the 38.2% retracement near 1.4096, followed by the 23.6% level at 1.4175, before attention turns to the cycle high around 1.4302. Conversely, the 78.6% retracement at 1.3878 provides initial support, followed by the recent swing low near 1.3763.

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

Canadian Dollar: frequently asked questions

Canadian Dollar: the main market drivers

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: a preference for riskier assets, or risk-on conditions, generally supports the CAD, whereas risk-off conditions involve a shift towards safe havens. Developments in the US economy are another important influence, as the US is Canada’s largest trading partner.

Bank of Canada policy and its effect on the Canadian Dollar

By determining the interest rate at which banks can lend to each other, the Bank of Canada (BoC) shapes borrowing rates across the economy and exerts considerable influence on the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Comparatively high interest rates generally favour the CAD. The BoC can also adjust credit conditions through quantitative easing or tightening; easing tends to weaken the CAD, while tightening tends to support it.

Oil prices and the Canadian Dollar

As Canada’s largest export, petroleum makes oil prices a major influence on the Canadian Dollar, often with an immediate effect on its value. When oil prices rise, overall demand for the currency typically increases and the CAD usually strengthens. Falling oil prices generally have the reverse effect. More expensive oil also raises the likelihood of a trade surplus, providing another source of support for the CAD.

Inflation’s influence on the Canadian Dollar

Inflation was traditionally regarded as harmful to a currency because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has produced the opposite effect. Higher inflation typically prompts central banks to raise interest rates, drawing capital from global investors seeking attractive returns. Those inflows lift demand for the domestic currency, which in Canada is the Canadian Dollar.

Economic indicators and the Canadian Dollar

GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all shape the Canadian Dollar’s direction. These macroeconomic releases provide a measure of economic health. A robust economy supports the CAD by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates, which strengthens the currency. Weak economic readings, by contrast, are likely to weigh on the CAD.