It can be seen that the USD/CAD pair continues its sideways consolidation price movement for the second day in a row and is trading above the 1.3600 level during Monday’s Asian session. Moreover, the mixed fundamental background requires caution before setting a position on an extension of last week’s rebound from around the psychological level of 1.3500.
A slight boost in the value of the US dollar (USD) is proving to be a key factor that provides a tailwind for the USD/CAD pair as the recent week begins. However, growing acceptance that the US Federal Reserve (Fed) will cut borrowing costs at least twice in 2026, boosted by Friday’s lower US consumer inflation data, is keeping US dollar bulls on the defensive. On the other hand, the Canadian dollar (CAD) is drawing some support from the neutral stance of the Bank of Canada (BoC), which is contributing to the curtailment of the currency pair.
In fact, the BoC said that heightened levels of economic and geopolitical uncertainty were behind its decision to maintain interest rates for a second time in January. The BoC further added that uncertainty is weighing on economic forecasts, which currently range from cuts to increases to holding for 2026. Additionally, stable oil prices provide additional support for the commodity-linked Loonie and facilitate keep the USD/CAD pair under control, suggesting any intraday move is more likely to be sold.
Traders also seem reluctant and prefer to wait for this week’s essential releases – Canadian consumer inflation data on Tuesday and minutes from Wednesday’s FOMC meetings. Trading will continue to be driven by speeches from influential FOMC members, which will drive demand for USD. Moreover, the second round of US-Iran nuclear talks will play a key role in providing a significant boost to oil prices and the USD/CAD pair.
Canadian Dollar FAQs
The key factors shaping the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of crude oil, which is Canada’s largest export, the condition of its economy, inflation and the trade balance, i.e. the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are taking on riskier assets (with risk) or looking for secure havens (with risk), with risk being positive relative to CAD. As the United States’ largest trading partner, the health of the U.S. economy is also a key factor influencing the exchange rate of the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The main goal of the BoC is to keep inflation at 1-3% by raising or lowering interest rates. Relatively higher interest rates tend to benefit CAD. The Bank of Canada may also operate quantitative easing and tightening to influence lending terms, with the former being CAD negative and the latter CAD positive.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil usually has a direct impact on the value of CAD. Generally speaking, if the price of oil increases, CAD also increases because aggregate demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which also supports CAD.
While inflation has always traditionally been considered a negative factor for currency because it reduces the value of money, in up-to-date times the opposite has been true with the relaxation of cross-border capital controls. Higher inflation prompts central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases are used to assess the condition of the economy and may affect the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of CAD. A mighty economy is good for the Canadian dollar. Not only will it attract more foreign investment, but it could encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is delicate, CAD will likely decline.
