How are rising oil prices lifting the Canadian Dollar and pushing USD/CAD lower?

USD/CAD came under pressure as a rise in crude oil prices lent support to the Canadian Dollar.
Concerns about disruptions to energy supplies intensified after drone strikes on Saudi and Russian oil facilities.
Broader market sentiment remains influenced by geopolitical tensions and uncertainty over the Fed’s interest-rate policy.

Pressure on USD/CAD persists as firmer crude oil prices support the commodity-linked Canadian Dollar (CAD). Trading near 1.4040 in Thursday’s Asian session, the pair is heading lower for a sixth straight day. Crude advanced after a drone strike on Saudi Aramco’s Shaybah oil field caused two casualties, escalating tensions in the Middle East and fuelling concerns about possible disruptions to energy supplies.

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

Diplomatic developments added another layer to the region’s geopolitical tensions. On Wednesday, Iranian Foreign Minister Abbas Araghchi said the United States must end its naval blockade and show a genuine willingness to pursue a diplomatic solution. He stressed that Tehran was prepared to return to negotiations if there was concrete evidence of a sincere American effort to secure a just and lasting end to the conflict.

Elsewhere, critical Russian oil facilities came under large-scale Ukrainian drone attacks this week. The strikes signalled Kyiv’s intention to obstruct Moscow’s planned increase in diesel exports under a recent agreement between Presidents Trump and Putin.

Ahead of next week’s Federal Reserve (Fed) meeting, investors are also closely assessing the outlook for monetary policy. The uncertainty remains unresolved after Fed Chair Kevin Warsh declined last week to indicate when further interest rate increases might be needed, or whether they would be necessary.

What does the IMF’s widening North American growth gap mean for USD/CAD under pressure?

Canada’s relative economic outlook is becoming less favourable, according to Societe Generale strategists assessing the latest IMF projections. They note that “with the IMF’s US growth forecast revised up to 2.5% this year (while remaining at 2.1% in 2027), the North American growth gap is widening.” To illustrate the weaker momentum in Canada, they add that “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, but the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada,”. Alongside the growth outlook, Societe Generale draw attention to policy and market interest rates, noting that “the chart on the left shows the two-year rate differential plotted against USD/CAD,”. This highlights the continuing role of relative short-term yields in shaping the Canadian Dollar’s performance against the US Dollar.

Canadian Dollar: frequently asked questions

Which factors matter most for the Canadian Dollar?

The Canadian Dollar (CAD) responds primarily to interest rates set by the Bank of Canada (BoC), oil prices, the strength of Canada’s economy, inflation and the trade balance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of its exports and imports. Investor appetite for risk is another influence: a shift towards riskier assets, known as risk-on, supports the CAD, whereas risk-off sentiment involves seeking safe-haven assets. Economic conditions in the US also play a major role, as it is Canada’s largest trading partner.

Why do Bank of Canada decisions matter for the Canadian Dollar?

By determining the interest rate at which banks lend to each other, the Bank of Canada (BoC) influences borrowing rates across the economy and, in turn, the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as required. Higher relative interest rates generally support the CAD. The BoC can also alter credit conditions through quantitative easing or tightening; easing is negative for the CAD, while tightening is positive.

Why is the Canadian Dollar sensitive to oil prices?

With petroleum accounting for Canada’s largest export, changes in oil prices tend to feed through immediately to the Canadian Dollar’s value. Rising oil prices generally lift the CAD by increasing overall demand for the currency, while falling prices have the reverse effect. A rise in oil prices also makes a positive trade balance more likely, providing further support to the CAD.

Why can inflation figures move the Canadian Dollar?

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

What do economic releases mean for the Canadian Dollar?

The Canadian Dollar can move in response to macroeconomic releases that indicate the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can all help determine the CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially prompting the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on the CAD.