Canadian Dollar Gains as U.S. Data, Oil Support Loonie

Key Moments

USD/CAD Under Pressure as Fed Hike Odds Recede

USD/CAD continued to move lower for a third consecutive session on Monday, trading around 1.3870 during Asian hours. The pair weakened as the U.S. Dollar lost momentum amid disappointing U.S. macro data and shifting expectations for Federal Reserve policy.

Data from the U.S. Census Bureau on Friday showed Retail Sales declined 0.6% month-over-month in July, reversing a 0.2% increase in June and falling short of the 0.1% gain anticipated by markets. On a yearly basis, Retail Sales grew 5.0% in July, compared with 6.8% previously.

The weaker figures added to a run of softer U.S. data, including CPI and PPI releases, prompting traders to further scale back expectations for additional Fed tightening. According to the CME FedWatch tool, markets are now assigning a 33.1% probability to a rate hike at the next meeting, down from 44% a week earlier.

Oil Rally Bolsters Canadian Dollar

The Canadian Dollar drew additional support from higher crude prices, a key driver for the commodity-linked currency. West Texas Intermediate (WTI) crude extended its advance for a second straight session, trading around $81.80 per barrel at the time of writing.

Oil prices climbed as heightened tensions in the Middle East reinforced concerns about supply risks. Over the weekend, Israel launched new strikes on Lebanon that killed 11 people, including a senior Hezbollah commander, keeping markets on alert for potential disruptions.

Gulf Outages Deepen Global Oil Market Tightness

Analysts at Commerzbank highlighted that mounting production losses in the Gulf region are tightening the global oil balance significantly. The bank estimates that “due to significant production losses in the Gulf region, total supply is expected to fall by 4.3 million barrels per day, meaning the oil market will be significantly undersupplied this year.”

Referring to the latest International Energy Agency projections, Commerzbank noted that “the supply deficit in the third quarter stands at 1.8 million barrels per day. This is 1 million barrels per day more than previously expected,” underscoring a rapid deterioration in the perceived supply-demand balance.

Geopolitical Risk: Iran Sanctions and Strait of Hormuz

Geopolitical risk remained elevated as U.S. policy toward Iran added another layer of uncertainty for energy markets. “Meanwhile, US President Donald Trump is preparing new economic sanctions aimed at forcing Iran to surrender, as pressure mounts on his administration to bring the military campaign to an end. The situation remains fragile as the interim ceasefire agreement between the US and Iran is set to formally expire later in the day, while negotiations to resolve the conflict and reopen the Strait of Hormuz remain deadlocked.”

Structural Drivers of the Canadian Dollar

The broader behavior of the Canadian Dollar is influenced by several fundamental factors. Key among them are interest rate settings by the Bank of Canada (BoC), the trajectory of oil prices, domestic economic performance, inflation dynamics, and Canada’s trade balance.

“The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s largest export, the health of its economy, inflation, and the trade balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment—whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off)—with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.”

Bank of Canada Policy and CAD

“The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.”

Oil Prices, Inflation, and Macro Data: Ongoing CAD Catalysts

“The price of oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so oil price tends to have an immediate impact on the CAD value. Generally, if oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which is also supportive of the CAD.”

“While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.”

“Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.”