Canadian Dollar consolidates near 1.3900 as oil gains offset bullish USD ahead of Fed
- USD/CAD struggles to gain any meaningful traction amid a combination of diverging forces.
- Elevated oil prices underpin the Loonie, though a bullish USD caps the upside for spot prices.
- Traders also seem hesitant and opt to wait for the outcome of the key FOMC policy meeting.
The USD/CAD pair holds steady near the 1.3900 mark during the Asian session on Tuesday, stalling the previous day's modest pullback from a nearly two-week top. Traders, however, seem hesitant to place aggressive directional bets amid mixed fundamental cues and ahead of the key central bank event risk.
Data released on Monday showed that Canada's headline Consumer Price Index (CPI) held steady at 3% in August, matching the previous month's reading and market forecasts. Meanwhile, the Bank of Canada's (BoC) preferred core gauge excluding food and energy remained near the 2% target. This backs the case that the BoC will keep rates unchanged through 2026, which, along with a bullish US Dollar (USD), continues to act as a tailwind for the USD/CAD pair.
Canada inflation steadies as RBC sees BoC on hold until 2027
Economists at Royal Bank of Canada note that Canadian inflation "held at 3% year-over-year in August, unchanged from July," with "underlying inflation pressures" described as having "remained comparatively contained." They highlight that there continued to be "limited evidence that elevated energy costs were generating significant second-round inflation," suggesting that recent energy price moves have not yet fed broadly into the price structure. Overall, RBC judges that the August data were "broadly consistent with our base case that the Bank of Canada will hold interest rates through the remainder of 2026 before gradually raising rates in 2027 as the economy strengthens."
US Treasury bond yields hold near multi-year tops amid rising bets for an interest rate hike by the US Federal Reserve (Fed) and inflation risks stemming from elevated energy prices. This keeps the USD Index (DXY), which tracks the Greenback against a basket of currencies, near a two-week top and turns out to be another factor supporting the USD/CAD pair. USD bulls, however, opt to wait for more cues about the Fed's policy path before positioning for any further gains.
Hence, the market focus will remain glued to the outcome of a two-day FOMC policy meeting, starting today. In the meantime, crude oil prices sit near the highest level since May 21 on the back of the US-Iran standoff and clashes in the Strait of Hormuz. This, in turn, is seen lending some support to the commodity-linked Loonie. Furthermore, the overnight failure near a technically significant 100-day Simple Moving Average (SMA) warrants some caution for USD/CAD bulls.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair keeps a capped tone beneath the the 38.2% Fibonacci retracement and the 100-day SMA confluence around 1.3930, with further barriers at the 50% retracement near 1.3989 and the 61.8% level around 1.4051. On the downside, the 23.6% Fibo. retracement at 1.3852 offers the first notable support, ahead of a more important structural floor near 1.3728, where buyers may attempt to stabilize the pair.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
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.
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.
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.