Canadian Dollar Dips as Oil Rise Helps Limit Losses

Key Moments

USD/CAD Climbs as Safe-Haven Demand Returns

USD/CAD advances after two consecutive sessions of declines, with the pair trading around 1.3900 in Asian hours on Thursday. The move reflects renewed strength in the US Dollar (USD) following the latest address by US President Donald Trump, which did not clearly signal a de-escalation in Middle East tensions and kept geopolitical uncertainty elevated.

Trump stated that Iran’s military capabilities have been “significantly weakened,” pointing to reduced missile and drone capacity. He also said that the US no longer depends on oil supplies from the Middle East. According to Trump, Iran’s naval and air forces have been “severely diminished,” and leadership losses have further eroded its operational capability. He indicated that the US aims to bring the conflict to a close within 2-3 weeks.

Fed Outlook and US Yields Underpin the US Dollar

The Greenback previously came under pressure as investors reassessed the policy trajectory of the US Federal Reserve (Fed) in the context of geopolitical developments, growth headwinds, and ongoing inflation concerns. The Fed left its benchmark rate unchanged at 3.50%-3.75% following its March 17-18, 2026 meeting.

Despite the unchanged stance, the median dot plot still signals one 25-basis-point rate reduction later in 2026, although some Fed officials now see no need for cuts this year. Market participants are also monitoring US Treasury yields, which are recovering as both 2-year and 10-year notes extend gains. The rebound in yields follows robust economic data that have strengthened expectations that rates could stay at current levels for an extended period.

St. Louis Fed President Alberto Musalem commented that existing monetary policy is appropriately calibrated and is likely to remain in place for some time.

Oil Rally Provides a Cushion for the Canadian Dollar

Upside in USD/CAD may be limited as the Canadian Dollar (CAD) finds some support from firmer crude prices. Canada is the largest exporter of crude oil to the United States, so movements in oil often have a meaningful impact on CAD dynamics.

West Texas Intermediate (WTI) crude rises nearly 5% after two sessions of losses, trading around $98.90 per barrel at the time of writing. The advance in oil prices follows Trump’s remarks, which did not introduce new information on Iran, leading to a cautious tone across energy markets.

Macro Drivers of the Canadian Dollar

The Canadian Dollar is influenced by several core factors: interest rate settings by the Bank of Canada (BoC), oil prices as Canada’s largest export, the strength of domestic economic activity, inflation dynamics, and the country’s trade balance. Market risk appetite also matters; a risk-on environment typically favors CAD, while risk-off conditions tend to support safe-haven currencies. The performance of the US economy is another major driver given Canada’s close trade ties with the United States.

Role of the Bank of Canada and Oil Prices

The BoC shapes short-term interest rates by setting the rate at which banks lend to each other, which then ripples through to borrowing costs across the economy. The central bank targets inflation in a 1-3% range, adjusting rates higher or lower to manage price pressures. Higher relative interest rates tend to support the CAD. The BoC can also deploy quantitative easing or quantitative tightening, with the former generally negative for CAD and the latter supportive.

Oil prices are a key transmission channel for CAD, as petroleum is Canada’s primary export. When oil prices climb, demand for CAD typically increases, which can push the currency higher. Rising oil prices also improve the likelihood of a positive trade balance, which is another constructive factor for CAD. Conversely, falling oil prices usually weigh on the currency.

Impact of Inflation and Economic Data on CAD

In the current global financial environment, higher inflation readings often lead central banks to raise interest rates, which can attract foreign capital and bolster the domestic currency. For Canada, stronger inflation can therefore be associated with a firmer CAD if it prompts tighter monetary policy.

Macroeconomic indicators such as GDP, Manufacturing and Services PMIs, labor market data, and consumer sentiment surveys also influence CAD performance. Robust data tend to support the currency by signaling economic strength and potentially encouraging the BoC to consider higher rates. Weaker data typically have the opposite effect and can pressure the Canadian Dollar.