Loonie Steadies as Truce Hopes Weigh on USD, Oil

Key Moments

USD/CAD Softens as Geopolitical Tensions Ease

USD/CAD continues to edge lower for a third consecutive day, with the pair trading around 1.4190 during Asian trading on Monday. The move comes as the US Dollar loses ground following reports that the United States and Iran have agreed to suspend attacks against one another ahead of planned peace talks in Doha this week.

Market participants remain acutely focused on developments in the Middle East, monitoring how evolving headlines may alter perceptions of regional stability and overall risk appetite. The tentative diplomatic opening follows several days of retaliatory strikes that were set off on Thursday, when an Iranian projectile struck a cargo ship. The incident prompted both Washington and Tehran to accuse each other of breaching an interim ceasefire that had been in place since June 17.

Official delegations from both countries are slated to convene in Qatar on Tuesday in an effort to negotiate a resolution to the conflict.

Fed Outlook Supports Dollar Despite Near-Term Weakness

Despite the latest pullback, the downside for the Greenback may be cushioned by persistent expectations that the Federal Reserve will maintain a hawkish stance. Data from the CME FedWatch Tool show that traders currently assign a 59.7% probability to an interest rate increase as early as September 2026.

This week’s US labor market releases, capped by Thursday’s Nonfarm Payrolls report, are expected to be pivotal for shaping views on the Fed’s policy path. Consensus forecasts call for June payroll growth of 114,000 jobs, while the unemployment rate is projected to remain unchanged at 4.3%.

Oil Weakness Limits Canadian Dollar Upside

The Canadian Dollar, which is closely tied to commodity performance, faces headwinds from softer crude prices. As one of the world’s major oil exporters, Canada is vulnerable to declines in oil, which can weigh on foreign capital inflows and dampen support for the CAD.

West Texas Intermediate (WTI) crude trades near $69.80 at the time of writing. Prices fell after a Reuters report on Sunday indicated that the United States and Iran have agreed to temporarily halt recent clashes in the Gulf and resume discussions on their dispute over the Strait of Hormuz.

Canadian Dollar: Core Drivers and Policy Dynamics

The Canadian Dollar’s performance is shaped by several core macroeconomic and policy factors. Key among them are interest rates set by the Bank of Canada (BoC), movements in oil prices, domestic economic strength, inflation trends, and the country’s trade balance – measured as the difference between the value of exports and imports.

Broader market sentiment also plays a role. Periods when investors favor higher-risk assets (risk-on) tend to benefit the CAD, while episodes of risk aversion (risk-off) are typically negative. Given the depth of economic ties, conditions in the US economy are another critical influence on the Canadian currency.

Bank of Canada Policy and Its Impact on CAD

The Bank of Canada exerts substantial influence over the CAD through its control of benchmark interest rates, which determine the cost at which banks lend to each other and, ultimately, to businesses and households. The BoC’s primary mandate is to keep inflation within a 1-3% range by adjusting rates higher or lower as needed. Comparatively higher interest rates generally support the Canadian Dollar.

In addition to rate decisions, the BoC can employ quantitative easing or tightening to influence financial conditions. Quantitative easing is usually associated with a weaker CAD, while quantitative tightening tends to be supportive of the currency.

Oil Prices, Inflation, and Economic Data as CAD Catalysts

Oil prices are a central driver of the Canadian Dollar because petroleum is Canada’s largest export. When oil prices rise, demand for CAD typically increases, often supporting the currency and improving the likelihood of a favorable trade balance. Conversely, falling oil prices tend to pressure the CAD.

Inflation data also have a notable impact. Although inflation historically was viewed as negative for a currency, more open capital flows have altered this relationship. Higher inflation now often leads central banks to raise interest rates, which can draw in foreign capital and bolster the local currency, including the CAD.

A broad range of macroeconomic indicators influences investor perceptions of Canada’s economic health and, by extension, the Canadian Dollar. Releases such as GDP, manufacturing and services PMIs, employment figures, and consumer sentiment surveys can all move the currency. Strong data tend to reinforce expectations of tighter policy and attract foreign investment, supporting the CAD, while weak data usually have the opposite effect.