Canadian Dollar Holds Position Amid Softening USD, Limited Upside

The USD/CAD pair has struggled to build on the overnight recovery from the 1.3900 mark and the weekly low, slipping further during Thursday’s Asian session. Spot prices remain close to the year‑to‑date high reached on Tuesday, hovering just below the mid‑1.3900s level and down less than 0.10% for the day amid mixed signals.

Iran’s decision to close the Strait of Hormuz following renewed U.S. strikes has lifted crude oil prices, which in turn supports Canada’s commodity‑linked currency. Meanwhile, subdued U.S. dollar activity further pressures the USD/CAD pair.

Escalating U.S.–Iran tensions could reinforce the greenback’s safe‑haven appeal, as Iran’s military leadership pledged a “crushing and decisive” response to any U.S. aggression. Rising energy prices continue to be a driver of inflationary pressure and expectations of a more hawkish Fed stance.

According to the CME Group’s FedWatch Tool, traders see a 70% probability that the U.S. central bank will raise borrowing costs by year‑end, following the latest Consumer Price Index showing a 4.2% YoY rise in May – the highest in three years. In contrast, the Bank of Canada remains dovish, prioritising a weak economy over inflation.

The divergent policy outlooks should limit downside risk for the USD/CAD pair, suggesting it is prudent to await a clear, sustained move before confirming a price ceiling. Market participants are now monitoring the upcoming U.S. Producer Price Index release and developments in the Middle East that could influence oil prices and currency dynamics.

Canadian Dollar FAQs

The primary drivers of the Canadian Dollar (CAD) include the Bank of Canada’s interest‑rate decisions, oil prices (Canada’s largest export), economic health, inflation, and the trade balance. Market sentiment—risk-on versus risk-off—also influences the CAD, with risk-on moves favouring the currency. As the U.S. is Canada’s largest trading partner, its economic performance significantly impacts the CAD.

The Bank of Canada shapes the CAD by setting key interest rates, which in turn affect borrowing costs across the economy. Its goal is to maintain inflation within 1‑3% through rate adjustments. Higher interest rates generally support the CAD, while quantitative easing tends to weaken it and tightening strengthens it.

Oil prices directly affect the CAD, as higher crude prices boost demand for Canadian exports and improve the trade balance, lifting the currency. Conversely, falling oil prices can depress the CAD.

Contrary to traditional expectations, higher inflation can strengthen the CAD in modern markets. Rising inflation often prompts higher rates, attracting foreign capital seeking better returns, which increases demand for the Canadian Dollar.

Macroeconomic indicators such as GDP, PMI, employment, and consumer sentiment gauge the economy’s health and can move the CAD. Strong data supports a stronger currency by attracting investment and encouraging rate hikes, while weak data may weaken the CAD.

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