Oil Rally Drives Canadian Dollar Strength as USD/CAD Approaches 1.3650 Mark

The USD/CAD exchange rate continues its downward trajectory, trading near 1.3660 during Monday’s Asian trading session. The currency pair remains under pressure close to its five-month bottom of 1.3642, which was established on December 26. For context, 41 USD currently translates to approximately 56.40 CAD at current exchange rates, reflecting the ongoing weakness in the US Dollar relative to its Canadian counterpart.

The Canadian Dollar’s resilience stems primarily from elevated crude oil prices, which have rebounded following a 2.5% decline in the preceding session. West Texas Intermediate (WTI) crude is currently valued around $57.20 per barrel. This recovery in energy prices proves particularly supportive for the loonie, given Canada’s position as America’s principal supplier of crude oil. Geopolitical factors continue to underpin the oil market, with Saudi military operations in Yemen and Iran’s escalatory rhetoric regarding confrontation with Western nations and Israel creating fresh concerns about potential supply disruptions.

Why Oil Prices Matter to CAD Valuations

Understanding the connection between crude prices and Canadian Dollar performance requires recognizing Canada’s export dependency. Since petroleum represents the nation’s most significant export commodity, fluctuations in global oil demand directly influence currency demand. When crude strengthens, international buyers require more Canadian Dollars to purchase oil, thereby supporting the currency’s valuation. The inverse relationship means that falling oil prices typically weaken the loonie.

US Dollar Weakness Amid Fed Rate Cut Expectations

The depreciation of the US Dollar against the CAD also reflects market expectations surrounding the Federal Reserve’s monetary trajectory. Market participants anticipate as many as two additional rate cuts throughout 2026, creating downward pressure on the USD. The Federal Reserve previously reduced its benchmark interest rate by 25 basis points during its December meeting, establishing the current target range between 3.50% and 3.75%.

Investors will monitor the Federal Open Market Committee’s December meeting minutes, scheduled for Tuesday’s release, as these records typically reveal the internal policy discussions that informed the Fed’s decision-making process and future direction. The central bank implemented a cumulative 75 basis points in rate reductions across 2025, responding to labor market softening despite persistent inflationary pressures.

What the Markets Expect Next

The CME FedWatch monitoring system indicates an 81.7% probability that the Fed will maintain rates unchanged at its January decision—a significant increase from the 77.9% probability recorded one week prior. Conversely, traders have reduced their bets on a 25-basis-point cut to 18.3% from the prior week’s 22.1%, signaling growing conviction that rate cuts will pause temporarily.

Key Drivers Influencing the Canadian Dollar Beyond Oil

The Bank of Canada’s interest rate decisions serve as a primary determinant of CAD strength. By setting the borrowing rate for financial institutions, the BoC influences economy-wide credit conditions and borrowing costs. The institution targets inflation maintenance within a 1% to 3% band by adjusting its policy rate accordingly. Generally, higher interest rates attract foreign investment capital seeking superior returns, thereby increasing CAD demand and strengthening the currency.

Economic indicators including gross domestic product growth, manufacturing and services activity indices, employment figures, and consumer confidence surveys all influence the loonie’s direction. A robust economic backdrop typically encourages the Bank of Canada to consider rate increases, supporting currency appreciation. Conversely, disappointing economic data typically pressures the CAD lower.

Inflation dynamics present a nuanced influence on currency valuations. While historically considered detrimental to currency strength due to monetary debasement, modern evidence suggests that elevated inflation often prompts central banks to raise interest rates, attracting capital inflows and supporting the domestic currency. The trade balance—measuring the differential between Canadian exports and imports—also impacts CAD valuations, with surpluses generally providing support.

Finally, broader market sentiment regarding risk appetite plays a significant role. During periods when investors embrace riskier asset classes (risk-on environments), the commodity-linked Canadian Dollar typically appreciates. Risk-off scenarios, where investors gravitate toward safe-haven assets, generally pressure the loonie downward. The relative health of the US economy, as Canada’s primary trading partner, remains another critical consideration affecting CAD performance.