Oil Rally Pressures USD/CAD Lower as Geopolitical Tensions Intensify

The currency pair USD/CAD has weakened for two consecutive sessions, currently trading near 1.3660 during Asian trading hours on Monday. The sustained weakness continues to approach the five-month trough of 1.3642 established on December 26. This depreciation reflects a broader shift in market dynamics where rising crude prices are providing tailwinds to Canada’s commodity-dependent economy.

Oil Price Surge Supports Canadian Currency

Crude Oil has staged a recovery after declining 2.5% in the previous trading session, with West Texas Intermediate (WTI) now trading around $57.20. The rebound stems from heightened geopolitical risks in the Middle East, including Saudi military operations in Yemen and Iran’s escalatory rhetoric toward the US, Europe, and Israel. These developments have amplified concerns over potential supply disruptions, driving oil prices higher and benefiting Canada as the world’s leading crude exporter to North America.

For traders converting 6 USD to CAD, the current exchange rate reflects this commodity-driven strength, with every barrel of oil gains translating into currency support for the loonie.

US Dollar Loses Ground Amid Fed Rate Cut Expectations

The American currency has come under pressure as market participants price in the possibility of additional Federal Reserve rate reductions throughout 2026. This rate-cut scenario contrasts sharply with the December decision, where the Fed implemented a 25 basis point reduction, adjusting the target range to 3.50%-3.75%. The cumulative 2025 rate cuts totaled 75 basis points, reflecting policymakers’ response to labor market softness despite persistent inflation concerns.

The CME FedWatch tool reveals evolving rate expectations, with an 81.7% probability currently assigned to rates remaining steady at the January FOMC meeting—up from 77.9% seven days prior. Conversely, the probability of a 25 basis point cut has declined to 18.3% from 22.1%.

FOMC Minutes in Focus

Upcoming guidance will come in the form of December FOMC Meeting Minutes releasing Tuesday, which may clarify the central bank’s internal discussions and economic outlook for 2026. Market participants will scrutinize this release for clues about the Fed’s inflation assessment and willingness to pursue further monetary easing.

Canadian Dollar Drivers: A Broader Perspective

The Bank of Canada (BoC) plays a pivotal role in CAD valuation through its interest rate decisions. The institution targets inflation maintenance within the 1-3% band, adjusting rates accordingly. Higher BoC rates typically strengthen the Canadian Dollar by attracting capital inflows seeking better returns.

Beyond monetary policy, several factors shape the Canadian currency:

Oil Prices: As Canada’s primary export commodity, petroleum price movements create immediate CAD volatility. Rising oil prices expand export revenues and often improve the trade balance, both supporting currency appreciation.

Economic Health: Macroeconomic indicators including GDP growth, manufacturing and services PMIs, employment data, and consumer sentiment surveys influence CAD direction. Robust economic performance encourages foreign investment and may prompt BoC rate hikes, strengthening the currency.

Trade Balance: The differential between Canadian exports and imports carries significant weight. A surplus supports CAD appreciation, while deficits weaken the currency.

Risk Sentiment: Market appetite for risk assets (risk-on environment) typically favors the CAD, whereas safe-haven flows (risk-off) create headwinds.

US Economy Health: Given the US as Canada’s largest trading partner, American economic strength influences cross-border trade flows and investment patterns.

The convergence of elevated crude prices and moderate Fed tightening creates a supportive backdrop for CAD strength relative to the USD, keeping the currency pair pressured toward lower levels.