Canadian Dollar Falls as Soft GDP and Lower Crude Lift USD

Key Moments

USD/CAD extended gains for an eighth straight session, trading near 1.4200 and hovering close to a two-month high.
Oil prices came under pressure as Middle East exports neared pre-war levels and the US prepared to release up to 40 million barrels from its Strategic Petroleum Reserve.
Canadian growth momentum cooled, with economists noting a slower third-quarter rebound even as August GDP was preliminarily estimated to rise 0.2%.

Energy-Linked Loonie Under Pressure

The Canadian Dollar remained on the defensive near two-month lows as a combination of falling oil prices and firm expectations for additional Federal Reserve rate hikes bolstered the US Dollar. USD/CAD advanced for the eighth consecutive session, trading around 1.4200 during Asian hours on Wednesday, as the commodity-sensitive CAD struggled to find support.

The slide in crude has been a key headwind. Middle East oil exports recovered toward pre-war volumes, alleviating supply concerns and weighing on energy prices. This backdrop has left the Canadian Dollar, which is closely tied to oil due to Canada’s export profile, under sustained selling pressure.

Oil Market Eases on Supply Recovery and US Actions

Energy markets softened as Middle Eastern crude shipments moved closer to normal levels. Exports from the region reached 17.5 million barrels per day, representing about 98% of baseline output and signaling a significant recovery in supply flows.

Supply was further supported by Saudi Arabia’s partial restart of its East-West pipeline at roughly half capacity. At the same time, covert tanker movements through the Strait of Hormuz remained in operation, adding to overall availability of crude.

Downward pressure on prices intensified on the back of additional developments in the United States. The US government announced plans to release up to 40 million barrels from the Strategic Petroleum Reserve (SPR) in an effort to contain domestic fuel costs. Fresh industry data also pointed to a 1-million-barrel build in US crude inventories over the past week, reinforcing the bearish tone in oil markets.

Oil Market Drivers	Details
Middle East exports	17.5 million barrels per day, about 98% of baseline output
Saudi East-West pipeline	Partially restarted at roughly half capacity
Strait of Hormuz flows	Covert tanker traffic remained active
US SPR release plan	Up to 40 million barrels to be released
US crude inventories	1-million-barrel build over the past week

Canadian Growth Momentum Moderates

Domestic data added to the softer tone for the Canadian Dollar. Economists at NBC noted that “this morning’s GDP report confirms that the Canadian economy’s rebound lost some momentum in the third quarter,” emphasizing a slowdown after several months of firm gains.

However, they also pointed out that Statistics Canada’s early estimate still “points to a 0.2% increase in GDP in August,” indicating that activity continued to grow, though at a more measured pace.

Fed Rate-Hike Bets Support US Dollar

The US Dollar gained additional traction as markets leaned further toward the prospect of more tightening from the Federal Reserve. According to the CME FedWatch Tool, traders are now assigning nearly a 68% probability to a rate hike in October and a 95% likelihood of a 25-basis-point increase in December.

Attention is turning to Friday’s US Nonfarm Payrolls release. Economists are projecting a 90,000 gain in jobs for September, with the Unemployment Rate expected to remain at 4.1%. These expectations, combined with elevated rate-hike pricing, have underpinned the US Dollar against the Canadian Dollar.

US Policy and Data Expectations	Market View
October Fed meeting	Nearly 68% chance of a rate hike
December Fed meeting	95% likelihood of a 0.25-point increase
September Nonfarm Payrolls	Forecast of 90,000 jobs added
US Unemployment Rate	Seen steady at 4.1%

Key Drivers of the Canadian Dollar

The Canadian Dollar is influenced by a range of macroeconomic and market factors. Central among these are the Bank of Canada’s interest rate settings, the trajectory of oil prices, the strength of the domestic economy, inflation dynamics, and Canada’s trade balance.

Interest rates set by the Bank of Canada (BoC) are particularly important, as they determine borrowing costs across the economy. The BoC aims to keep inflation within a 1-3% range by adjusting rates. Higher relative interest rates tend to support the CAD, while lower rates can weigh on the currency. The central bank can also deploy quantitative easing or tightening, with the former generally negative and the latter positive for the Canadian Dollar.

Oil prices have a direct impact on the currency, given that petroleum is Canada’s largest export. An increase in oil prices typically boosts demand for CAD as export revenues rise, while declining prices often exert downward pressure. Higher oil prices also tend to improve the trade balance, which can further underpin the currency.

Inflation data play a significant role as well. In the current environment, higher inflation often leads central banks to raise interest rates, attracting capital inflows from global investors seeking higher yields. This can increase demand for the Canadian Dollar.

Broader economic indicators – including GDP, Manufacturing and Services PMIs, labor market data, and consumer sentiment surveys – also influence CAD performance. A stronger economy tends to be supportive of the currency by drawing in foreign investment and potentially encouraging the BoC to tighten policy. Conversely, weaker data can put the Canadian Dollar under pressure.

Market sentiment is another important component. In risk-on periods, when investors are more willing to hold riskier assets, the CAD often benefits. During risk-off episodes, demand can shift toward safe-haven assets, which may weigh on the Canadian currency. Given Canada’s deep economic ties with the United States, the health of the US economy also remains a critical factor for CAD valuation.