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

Below 1.4050: USD/CAD hits monthly lows, nearly 1.8% off last week's highs.
Five-month highs in Brent Crude prices fuel a Canadian Dollar rally.
Expectations of a Fed pause next week keep the US Dollar under pressure.

USD/CAD has dropped below 1.4050. The pair is now nearly 1.8% below last week’s highs. On Tuesday, the Canadian Dollar (CAD) advances for a fourth consecutive day, supported by Oil prices reaching their highest since May. Meanwhile, fading expectations of immediate Federal Reserve (Fed) rate increases weigh on the US Dollar (USD).

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

This week’s Crude Oil gains have given the Canadian Dollar further support. A decision by US President Donald Trump to waive sanctions on Russia has not delivered the intended relief to Crude markets. Increasing attacks on vessels trying to navigate the Strait of Hormuz are putting additional pressure on supplies from Gulf countries.

Two vessels attacked in Hormuz, Iran reports

Two tankers were set on fire 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 escalation of its rhetoric towards the United States and Israel, the Islamic Republic warned the allies not to resume attacks on Iran. It also threatened to close the Strait of Hormuz completely and impose further blockades in the Strait of Bab el-Mandeb and the Suez Canal.

Although tensions in the Middle East are weakening investor risk appetite, they continue to support the Canadian Dollar. Oil is Canada’s largest export, and elevated prices substantially boost the country’s foreign revenues.

By contrast, the US Dollar remains under pressure as markets adjust to the prospect of no Federal Reserve (Fed) rate increase next week. According to the FedWatch Tool, futures markets assign a more than 80% probability to unchanged rates at the October 28-29 monetary policy meeting. That compares with less than 50% one month ago.

Canadian Dollar: Key Questions

Canadian Dollar: The Main Drivers

Bank of Canada (BoC) interest rates, Oil prices, economic health, 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 exports and imports. Investor sentiment also matters: a willingness to hold riskier assets, known as risk-on, supports CAD, whereas risk-off describes a preference for safe havens. The strength of the US economy is another major influence, as the United States is Canada’s largest trading partner.

Bank of Canada Policy and Its Effect on CAD

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

Oil Prices: A Key Influence on CAD

As petroleum is Canada’s largest export, changes in Oil prices often have an immediate effect on the Canadian Dollar’s value. Rising Oil prices generally lift CAD by increasing overall demand for the currency; falling prices tend to have the reverse effect. Higher Oil prices also make a trade surplus more likely, providing another source of support for CAD.

Inflation Data and Canadian Dollar Demand

Traditionally, inflation was viewed as detrimental to a currency because it erodes the value of money. With cross-border capital controls becoming less restrictive in modern times, however, the relationship has reversed. Higher inflation often prompts central banks to raise interest rates, drawing capital from global investors seeking attractive returns. Those inflows increase demand for the domestic currency, which in Canada is the Canadian Dollar.

Economic Indicators and CAD Performance

The Canadian Dollar can respond to macroeconomic releases that signal the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys all help shape CAD’s direction. A robust economy supports the currency by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic figures, by contrast, are likely to push CAD lower.