Canadian Dollar declines despite higher oil prices

USD/JPY strengthens as the US Dollar gains following high US CPI inflation data.
CME FedWatch Tool suggests nearly a 91% probability of a rate hike in December.
The commodity-linked Canadian Dollar may gain amid higher oil prices.

USD/CAD remains stronger for the second successive day, trading around 1.4190 during Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) remains stronger following the latest inflation report, which cemented market expectations for a Federal Reserve rate hike in December. According to the CME FedWatch Tool, markets are now pricing in approximately a 91% probability of a rate increase next month.

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US Consumer Price Index rose 0.4% month-over-month in October, beating the 0.3% forecast even as it slowed from September's 0.6% gain. Meanwhile, Core CPI, which excludes food and energy prices, rose 0.3%, matching September's pace and topping the 0.2% estimate. The Bureau of Labor Statistics omitted annual figures for October due to last year's government shutdown.

Despite these bullish inflation metrics, the Greenback may face headwinds from diminishing safe-haven demand as hopes grow for a diplomatic resolution to the US-Iran conflict. US President Donald Trump signaled that further military strikes against Iran might no longer be necessary, while US Secretary of State Marco Rubio noted at a G7 meeting that major combat operations were no longer required. Simultaneously, Congressional Democrats are weighing the use of the upcoming government funding deadline to encourage the Trump administration toward a peaceful resolution.

The upside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may receive support from higher oil prices. West Texas Intermediate (WTI) oil price gains ground after two days of losses, trading around $85.70 per barrel at the time of writing.

However, crude oil prices may depreciate following signs of easing tensions between the US and Iran. US President Donald Trump suggested that additional military strikes against Iran may no longer be necessary, fueling optimism for a potential diplomatic settlement. Meanwhile, Congressional Democrats are considering using the upcoming government funding deadline to push the Trump administration toward ending the conflict.

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

Goolsbee flags ‘real inflation issue’, lifting hawkish Fed tone and supporting the Dollar

Fed’s Goolsbee delivered a distinctly more hawkish tone, with the FXS Speechtracker score at 8/10, notably above the 6.8/10 historical average and underscoring heightened concern about persistent price pressures. The emphasis that the latest CPI was “borderline disturbing,” that services inflation is “not coming down,” and that there is “a real inflation issue” that the Fed is “going to have to deal with” signals a clear willingness to tighten further if needed, even as the job market is described as “steady and stable.” This combination of persistent inflation worries and a resilient labor backdrop is Dollar-supportive and argues against imminent policy easing.

The FXS Fed Sentiment Index rose by 1.69 points to 145.61, reinforcing that the overall policy tone remains firmly in hawkish territory well above the neutral 100 mark. In the context of the elevated FXS Speechtracker score, this move in the FXS Fed Sentiment Index suggests markets should price in a higher-for-longer Fed path, which is typically constructive for the Dollar and a headwind for risk-sensitive currencies.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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