USD/CAD declines as higher oil prices bolster Canadian Dollar

USD/CAD came under pressure as rising crude prices supported the Canadian Dollar.
Energy supply concerns intensified after drones struck oil infrastructure in Saudi Arabia and Russia.
Uncertainty over Fed interest-rate policy, alongside geopolitical risks, remains a driver of broader market sentiment.

USD/CAD trades near 1.4040 in Thursday’s Asian session. The pair is extending its decline into a sixth consecutive day as the oil rally strengthens the commodity-linked Canadian Dollar (CAD). Crude prices rose after a drone strike on Saudi Aramco’s Shaybah oil field caused two casualties. The attack deepened geopolitical tensions in the Middle East and fuelled concerns about possible disruptions to energy supplies.

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Diplomatic developments added to the region’s geopolitical complexity. On Wednesday, Iranian Foreign Minister Abbas Araghchi said the United States must end its naval blockade and show a genuine commitment to a diplomatic solution. Tehran stands ready to restart talks if there is concrete evidence of a sincere American effort to secure a just and lasting end to the conflict, Araghchi stressed.

Elsewhere, major drone strikes launched by Ukraine this week targeted critical Russian oil infrastructure. The attacks 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 assessing the direction of monetary policy. The outlook remains uncertain after Fed Chair Kevin Warsh declined last week to indicate when further interest rate increases might occur or whether they would be needed.

USD/CAD pressured; IMF forecasts show wider North American growth gap

Canada’s relative economic backdrop is deteriorating, according to Societe Generale strategists’ reading of the latest IMF forecasts. 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.” The strategists 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,” supporting the view that Canadian momentum is weaker. Policy and market rates remain relevant too. Societe Generale observes that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” highlighting the continuing role of relative short-dated yields in shaping the Canadian Dollar’s performance against the US Dollar.

Canadian Dollar: key questions

Which factors matter most for the Canadian Dollar?

Bank of Canada (BoC) interest rates, oil prices, economic conditions, inflation and the trade balance are the main drivers of the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of exports and imports. Investor sentiment also matters: a willingness to hold riskier assets, known as risk-on, generally supports CAD, whereas risk-off describes a preference for safe havens. The US is Canada’s largest trading partner, making the strength of the US economy another important influence on the currency.

How does Bank of Canada policy affect the Canadian Dollar?

By setting the rate at which banks can lend to each other, the Bank of Canada (BoC) influences borrowing costs across the economy and has a substantial impact on the Canadian Dollar. Keeping inflation within 1-3% is its primary objective, pursued by raising or lowering interest rates. Relatively high rates generally support CAD. The BoC can also alter credit conditions through quantitative easing or tightening. Easing tends to weigh on CAD, while tightening tends to support it.

Why do oil prices move the Canadian Dollar?

As petroleum is Canada’s largest export, changes in oil prices tend to affect the Canadian Dollar immediately. Rising oil prices generally lift overall demand for CAD and push the currency higher; falling prices usually have the reverse effect. More expensive oil also tends to make a trade surplus more likely, providing further support for CAD.

What does inflation mean for the Canadian Dollar?

Inflation was traditionally viewed 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. Central banks tend to respond to higher inflation by raising interest rates. Those rates draw capital from global investors seeking attractive returns, increasing demand for the domestic currency, which in Canada is the Canadian Dollar.

How do economic releases affect the Canadian Dollar?

The Canadian Dollar can respond to macroeconomic releases because they reveal the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys all help shape CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak data, by contrast, are likely to push CAD lower.