Canadian Dollar Rises, Sellers Stay Cautious

Key Moments

USD/CAD Slips on Softer Dollar, Holds Above Recent Low

The USD/CAD pair came under renewed selling pressure during the Asian session on Friday, weighed by a softer US Dollar. The pair was last seen trading around the 1.4070 area, down 0.10% on the day. Despite the intraday move lower, spot levels remain above the previous day’s swing low and the pair stays on course to post modest gains for the first time in three weeks.

Oil Pullback and Policy Divergence Support the Greenback

Crude oil prices have retreated from their highest level since June 11 as traders booked profits heading into the week. The pullback in oil, a key Canadian export, acts as a headwind for the commodity-linked Canadian Dollar.

At the same time, diverging expectations for monetary policy between the Bank of Canada (BoC) and the US Federal Reserve, combined with newly announced tariffs from US President Donald Trump, are working against the Loonie. These elements reinforce an underlying bullish tone for the USD and argue for caution before adopting strong bearish positions in USD/CAD.

BoC Seen on Hold as Fed Hike Expectations Build

Recent soft Canadian consumer inflation data have strengthened expectations that the BoC will leave interest rates unchanged for the remainder of 2026. In contrast, market participants have been assigning a higher probability that the Federal Reserve will increase borrowing costs by the end of this year amid concerns about inflation pressures driven by energy prices.

In addition, any further escalation in tensions between the US and Iran is expected to help contain deeper declines in the US Dollar, given its appeal as a safe-haven asset. This backdrop limits the downside in USD/CAD despite the current pullback.

Trump Tariffs Add to Risk-Off Mood

The Trump administration is preparing to implement broad new tariffs of 10% to 12.5% on 60 of the top trading partners, covering nearly all of the country’s imports. This move further dampens risk appetite amid ongoing geopolitical uncertainties and lends support to USD bulls.

Given these cross-currents, many market participants may prefer to see additional confirmation through follow-through selling before concluding that USD/CAD’s recovery from its more than one-month low has definitively stalled.

Data Releases and FOMC in Focus

Attention now turns to the release of flash US Purchasing Managers’ Indexes, which could influence the trajectory of the US Dollar in the near term. At the same time, any fresh developments related to the Middle East crisis are likely to affect oil prices and, by extension, trading conditions in USD/CAD within what remains a broadly constructive technical and fundamental backdrop.

Looking ahead, the focus will shift to next week’s closely watched two-day FOMC meeting. The outcome will be key in shaping expectations for the Greenback and setting the near-term direction for USD/CAD.

Canadian Dollar: Key Drivers Explained

Core Factors Moving the Canadian Dollar

The Canadian Dollar (CAD) is primarily driven by:

• The level of interest rates set by the Bank of Canada.
• The price of oil, which is Canada’s largest export.
• Overall economic performance and inflation trends.
• The trade balance, reflecting the difference between exports and imports.
• Market sentiment toward risk, with risk-on conditions generally favoring CAD.
• Economic conditions in the United States, Canada’s largest trading partner.

BoC Policy and Its Impact on CAD

The Bank of Canada influences the Canadian Dollar through the policy rate at which banks lend to each other, which in turn affects broader borrowing costs. The BoC’s primary objective is to keep inflation within a 1-3% range by raising or lowering interest rates as needed. Higher relative interest rates tend to support the CAD.

The central bank can also employ quantitative easing or tightening to manage credit conditions. Quantitative easing is typically negative for CAD, while quantitative tightening is generally positive for the currency.

Oil Prices and the Canadian Dollar

Oil prices play a central role in determining the value of the Canadian Dollar, as petroleum is Canada’s largest export. When oil prices rise, demand for CAD typically increases and the currency tends to appreciate. When oil prices fall, CAD often comes under pressure. Higher oil prices also increase the likelihood of a positive trade balance, which is supportive of the Canadian currency.

Inflation Data and Currency Dynamics

In the current environment of liberalized cross-border capital flows, higher inflation often leads central banks to raise interest rates. For Canada, this can attract greater capital inflows from global investors seeking higher returns, increasing demand for the Canadian Dollar. Thus, while inflation can erode the value of money, its impact via higher interest rates can be positive for CAD.

Macroeconomic Releases and CAD Performance

Macroeconomic indicators such as GDP, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys are closely watched for clues about the health of the Canadian economy. Strong data can bolster the Canadian Dollar by attracting foreign investment and by potentially prompting the BoC to consider higher interest rates. Conversely, weak economic releases are typically negative for CAD.