The USD/CAD pair remains under pressure for a second straight session, trading near 1.3950 during early Asian hours on Monday. The pair struggles to gain traction as the Canadian Dollar (CAD) strengthens on the back of higher crude oil prices, while the US Dollar (USD) faces headwinds from growing expectations of Federal Reserve rate cuts.
Oil Prices Boost CAD on Smaller OPEC+ Output Hike
Canada, being the largest oil exporter to the US, often sees its currency benefit from rising oil prices. At the time of writing, WTI crude oil is trading around $61.50 per barrel, extending gains after OPEC+ announced a smaller-than-expected production increase for November.
The cartel, led by Saudi Arabia and Russia, confirmed it will raise output by 137,000 barrels per day (bpd) next month — the same as October’s hike and below prior market expectations. The limited increase eased concerns of oversupply, offering additional support to oil prices and, in turn, the CAD.
Fed Rate Cut Expectations Weigh on the US Dollar
Meanwhile, the US Dollar continues to face downside pressure as markets increasingly price in rate cuts from the Federal Reserve. According to the CME FedWatch Tool, there is a 95% probability of a rate cut in October, with an 84% chance of another reduction in December.
The Fed’s dovish outlook, combined with the ongoing US government shutdown, has dampened investor sentiment toward the USD. Lawmakers have failed to pass funding bills for a fourth consecutive time, extending the shutdown and delaying the release of key economic data — including the Nonfarm Payrolls (NFP) originally scheduled for last Friday.
Market Outlook
The near-term bias for USD/CAD remains tilted to the downside, as oil-driven CAD strength and USD weakness from policy uncertainty and rate cut bets continue to weigh on the pair. Traders will keep a close eye on developments around the US fiscal situation and upcoming economic releases from both countries for fresh directional cues.
Canadian Dollar – Key Market Drivers
- Oil Prices: Canada’s status as a major oil exporter means CAD often rises with crude oil prices. A rally in WTI typically strengthens the loonie.
- Bank of Canada (BoC) Policy: Interest rate decisions and guidance from the BoC significantly impact CAD. Higher rates attract capital inflows and support the currency.
- Economic Data: Strong domestic indicators like GDP growth, employment, and inflation generally boost CAD value.
- US-CAD Trade Ties: Given Canada’s deep trade ties with the US, economic health and demand from the US also influence CAD’s direction.