Canadian Dollar falls even as oil prices climb

Elevated US CPI inflation lifts the US Dollar, pushing USD/JPY higher.
Nearly 91% odds of a December rate rise are indicated by the CME FedWatch Tool.
Higher oil prices could support the commodity-linked Canadian Dollar.

1.4190 is the approximate level for USD/CAD during Wednesday’s Asian session. The pair is firmer for a second consecutive day, supported by US Dollar (USD) strength after the latest inflation release reinforced expectations of a Federal Reserve rate rise in December. The CME FedWatch Tool shows markets pricing in approximately a 91% chance of an increase next month.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October’s US Consumer Price Index increased 0.4% month-on-month, exceeding the 0.3% forecast but moderating from September’s 0.6% rise. Excluding food and energy, Core CPI advanced 0.3%, unchanged from September’s pace and above the 0.2% estimate. Annual October figures were not published by the Bureau of Labor Statistics because of last year’s government shutdown.

Although the inflation readings favour the Greenback, fading demand for safe-haven assets could weigh on it as prospects for a diplomatic solution to the US-Iran conflict improve. Further military strikes against Iran might no longer be needed, US President Donald Trump indicated. At a G7 meeting, US Secretary of State Marco Rubio also said major combat operations were no longer necessary. Congressional Democrats, meanwhile, are considering using the approaching government funding deadline to encourage the Trump administration to pursue a peaceful resolution.

Higher oil prices could underpin the commodity-linked Canadian Dollar (CAD), potentially limiting USD/CAD’s advance. Following two days of declines, West Texas Intermediate (WTI) oil is recovering and trades near $85.70 per barrel at the time of writing.

Signs of reduced US-Iran tensions could, however, put downward pressure on crude prices. Optimism over a possible diplomatic settlement increased after US President Donald Trump suggested further military strikes against Iran might no longer be needed. Congressional Democrats are also weighing whether to use the approaching government funding deadline to press the Trump administration to end the conflict.

Chart Analysis USD/CAD — USD/CAD: Daily Price Chart

Goolsbee’s ‘real inflation issue’ Warning Reinforces Hawkish Fed Tone, Supports Dollar

8/10 was the FXS Speechtracker score for the Fed’s Goolsbee, signalling a markedly more hawkish stance. The reading exceeded the historical average of 6.8/10 and highlighted increased concern over persistent price pressures. Describing the latest CPI as “borderline disturbing,” services inflation as “not coming down,” and the situation as “a real inflation issue” that the Fed is “going to have to deal with” points to a clear readiness to tighten policy further if necessary. That message came even as the labour market was characterised as “steady and stable.” Persistent inflation concerns alongside a resilient labour market support the Dollar and weaken the case for near-term policy easing.

A 1.69-point increase took the FXS Fed Sentiment Index to 145.61, confirming an overall policy stance firmly in hawkish territory and well above the neutral 100 level. Alongside the high FXS Speechtracker score, the index’s advance suggests markets should factor in a higher-for-longer Federal Reserve policy path. Such a backdrop typically favours the Dollar while weighing on risk-sensitive currencies.

(An AI tool assisted in preparing this story’s technical analysis. Find out more.)

Canadian Dollar: Key Questions Answered

Which factors matter most for the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), oil prices, economic conditions, inflation and the trade balance are the main drivers of the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor sentiment also matters: appetite for riskier assets, known as risk-on, tends to favour the CAD, whereas risk-off sentiment reflects a preference for safe havens. Conditions in the US economy are another important influence, given that the US is Canada’s largest trading partner.

Why do Bank of Canada decisions matter for the Canadian Dollar?

By setting the interest rate at which banks can lend to each other, the Bank of Canada (BoC) strongly influences the Canadian Dollar. That rate feeds through to borrowing costs across the economy. Keeping inflation at 1-3% is the BoC’s primary objective, pursued through increases or reductions in interest rates. Relatively high rates generally support the CAD. Quantitative easing and quantitative tightening offer additional ways to influence credit conditions: easing tends to weaken the currency, while tightening tends to strengthen it.

Why are oil prices important for the Canadian Dollar?

As petroleum is Canada’s largest export, changes in oil prices tend to affect the Canadian Dollar’s value immediately. Rising oil prices generally lift the CAD by increasing overall demand for the currency; falling prices generally have the reverse effect. More expensive oil also raises the likelihood of a trade surplus, providing another source of support for the CAD.

Why can inflation readings move the Canadian Dollar?

Inflation traditionally carried negative implications for a currency because it erodes the value of money. With cross-border capital controls relaxed in modern times, however, the relationship has actually reversed. Central banks tend to respond to higher inflation by raising interest rates. Those higher returns attract capital from global investors seeking a profitable place for their funds, lifting demand for the domestic currency, which in Canada is the Canadian Dollar.

Why does economic data matter for the Canadian Dollar?

By indicating the economy’s health, macroeconomic releases can move the Canadian Dollar. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys all help shape the CAD’s direction. Economic strength supports the currency by drawing in more overseas investment and potentially prompting the Bank of Canada to raise interest rates. Weak data, by contrast, are likely to put downward pressure on the CAD.