Weaker USD keeps Canadian Dollar near September 16 highs despite falling oil prices

Buying interest in USD/CAD remains limited, leaving the pair close to a one-and-a-half-month low.
The Loonie faces pressure from weaker crude oil prices, while optimism over Iran diplomacy drags on the USD.
Attention turns to the US ISM Manufacturing PMI before Friday’s employment releases from the US and Canada.

With opposing forces limiting its modest intraday recovery, USD/CAD trades near 1.3965 in the early European session. A weak start to the week for crude oil weighs on the commodity-linked Loonie, lending support to the pair. At the same time, fading demand for safe-haven assets puts pressure 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

Efforts to secure an agreement ending the US-Israeli war on Iran reportedly continued on Sunday, when Iranian negotiators met Qatari mediators for a third consecutive day. Iran has also put forward a two-day (48-hour) proposal to reopen the Strait of Hormuz, conditional on the US meeting a set of requirements. Meanwhile, US President Donald Trump said talks with Iran were going fine and that Iran wanted a deal. With no significant military escalation over the weekend, crude oil has also seen some profit-taking after its recent advance to the highest level since mid-May.

The resulting pressure on the Canadian Dollar (CAD) largely outweighs support from the Bank of Canada’s (BoC) abrupt move towards monetary tightening. For the USD, however, hopes of a diplomatic settlement to conflicts in the Middle East remain a source of weakness. A geopolitical risk premium nevertheless persists: Trump has not ruled out additional military action following 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 options for retaliation.

Why do oil risks remain tilted upwards amid Strait of Hormuz tensions?

From a market standpoint, MUFG/BTMU analysts caution that “the distribution of oil risks remains asymmetric.” While they recognise that a diplomatic breakthrough could “compress some geopolitical premium,” they also 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.

A further source of potential support for the USD and USD/CAD is the roughly 75% probability traders have priced in for another increase in borrowing costs by the US Federal Reserve (Fed) in December. Investors may also prefer to stay on the sidelines before the important US macroeconomic releases due at the start of the new month. The schedule begins with the ISM Manufacturing PMI later today, although the main focus remains Friday’s closely followed monthly employment figures from Canada and the US, with the latter popularly known as the Nonfarm Payrolls (NFP) report.

What does the USD/CAD daily chart show?

Technical Outlook

Trading below the 100-day Simple Moving Average (SMA) at 1.4047 leaves USD/CAD’s near-term bias bearish. The pair is also hovering near the 61.8% Fibonacci retracement at 1.3969. Above current prices, the tight resistance cluster comprising the 50.0% retracement at 1.4033 and the 100-day SMA indicates that rebounds remain exposed to selling pressure.

For a recovery to progress, USD/CAD would first have to overcome the 50.0% Fibonacci retracement and the adjacent 100-day SMA at 1.4047. Beyond that, resistance is expected at the 38.2% retracement near 1.4096, followed by the 23.6% level at 1.4175, before the cycle high around 1.4302 comes into focus. If prices decline, the first support is at the 78.6% level of 1.3878, followed by the recent swing low near 1.3763.

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

Canadian Dollar: Frequently Asked Questions

Which factors have the greatest influence on the Canadian Dollar?

Interest rates determined by the Bank of Canada (BoC), oil prices, economic health, inflation and the trade balance are among the main influences on the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor sentiment matters too: a willingness to buy riskier assets, known as risk-on, supports the CAD, whereas risk-off sentiment reflects a preference for safe havens. The strength of the US economy is another important influence, given that the US 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 can lend to each other, the Bank of Canada (BoC) exerts considerable influence over the Canadian Dollar. That rate, in turn, affects borrowing rates across the economy. Keeping inflation within 1-3% is the BoC’s primary objective, which it pursues by raising or lowering interest rates. Comparatively high rates generally support the CAD. The central bank can also alter credit conditions through quantitative easing or quantitative tightening; easing is negative for the CAD, while tightening is positive.

Why are oil prices important for the Canadian Dollar?

As petroleum is Canada’s largest export, changes in oil prices usually have an immediate bearing on the Canadian Dollar’s value. Rising oil prices generally lift the CAD by increasing aggregate demand for the currency, while falling prices have the reverse effect. More expensive oil also tends to improve the likelihood of a positive trade balance, providing further support for the CAD.

What does inflation data mean for the Canadian Dollar?

Traditionally, inflation was 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 reversed that relationship. When inflation rises, central banks tend to increase interest rates, drawing capital from global investors seeking attractive returns on their funds. These inflows raise demand for the domestic currency, which in Canada is the Canadian Dollar.

Why can economic releases move the Canadian Dollar?

By providing a measure of economic health, macroeconomic releases can affect the Canadian Dollar. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of shaping the CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on the CAD.