High Oil prices and a softer US Dollar lift Canadian Dollar to new monthly highs

Below 1.4050 at monthly lows, USD/CAD trades nearly 1.8% lower than last week's peaks.
A climb in Brent Crude to five-month highs fuels the Canadian Dollar's rally.
Expectations of a Fed pause next week keep the US Dollar under pressure.

The Canadian Dollar (CAD) strengthens for a fourth straight day on Tuesday, pushing USD/CAD below 1.4050 and leaving the pair nearly 1.8% below last week’s peaks. Supporting the CAD, Oil has climbed to its highest level since May, while fading expectations of immediate Federal Reserve (Fed) rate increases weigh on the US Dollar (USD).

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

Further support for the Canadian Dollar this week has come from the surge in Crude Oil. Although US President Donald Trump decided to waive sanctions on Russia, the move has not delivered the intended relief to Crude markets. Increasing attacks on vessels trying to pass through the Strait of Hormuz have instead intensified pressure on supplies from Gulf countries.

What has Iran announced about attacks on two vessels in Hormuz?

Two tankers were set ablaze by mines and stopped in the southern Strait of Hormuz, Iran’s Revolutionary Guards Navy told the local Tasnim News agency earlier on Tuesday.

In a recent hardening of its rhetoric towards the United States and Israel, the Islamic Republic has warned the allies against launching fresh attacks on Iran. It has also threatened to close the Strait of Hormuz completely and impose further blockades in the Strait of Bab el-Mandeb and the Suez Canal.

While tensions in the Middle East are dampening investors’ risk appetite, they continue to support the Canadian Dollar. Oil is Canada's leading export, and higher prices are significantly boosting the country’s foreign revenues.

By contrast, the US Dollar remains under pressure as markets adjust to the prospect of no Federal Reserve (Fed) interest rate increase next week. According to FedWatch Tool data, futures now imply a more than 80% probability that rates will remain unchanged at the October 28-29 monetary policy meeting, compared with less than 50% one month earlier.

Canadian Dollar: frequently asked questions

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 among the main influences on the Canadian Dollar (CAD). Oil is Canada’s biggest export, while the Trade Balance measures the difference between the value of its exports and imports. Investor sentiment also matters: a willingness to hold riskier assets (risk-on) generally supports the CAD, whereas a preference for safe havens signals a risk-off environment. Since the US is Canada’s largest trading partner, the strength of the US economy is another important influence on the currency.

Why do Bank of Canada decisions affect the Canadian Dollar?

By determining the interest rate at which banks lend to each other, the Bank of Canada (BoC) exerts considerable influence over the Canadian Dollar and borrowing rates across the economy. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Comparatively high rates generally support the CAD. The Bank of Canada can also alter credit conditions through quantitative easing or tightening; easing tends to weigh on the CAD, while tightening tends to strengthen it.

Why is the Canadian Dollar sensitive to Oil prices?

As petroleum is Canada’s largest export, changes in Oil prices are a major influence on the Canadian Dollar and often affect its value immediately. Rising Oil prices typically lift overall demand for the currency, strengthening the CAD, while falling prices tend to have the reverse effect. More expensive Oil also increases the likelihood of a positive Trade Balance, providing further support to the Canadian Dollar.

Why can inflation figures move the Canadian Dollar?

Inflation was traditionally viewed as harmful to a currency because it erodes the value of money. With cross-border capital controls becoming less restrictive in modern times, however, the effect has actually been the reverse. Central banks tend to respond to higher inflation by raising interest rates, drawing capital from international investors looking for attractive returns. Those inflows boost demand for the domestic currency, which in Canada is the Canadian Dollar.

What role do economic releases play in Canadian Dollar movements?

By indicating the state of the economy, macroeconomic releases can influence the Canadian Dollar. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are all capable of shaping the CAD’s direction. Economic strength supports the currency by attracting greater foreign investment and may also prompt the Bank of Canada to raise interest rates, strengthening it further. Weak economic readings, on the other hand, are likely to weigh on the CAD.