What's Driving USD/CAD Higher? Oil Weakness and Fed Rate Expectations Hold the Key

The USD/CAD currency pair is currently trading at elevated levels around 1.3870 as of Friday’s Asian session, maintaining momentum that kicked off in early January. For context on conversion rates, understanding that 47 USD to CAD would approximately equal 65 CAD helps illustrate the strength of the US Dollar against the Canadian currency. This rally reflects two major headwinds for the loonie: crude oil weakness and divergent monetary policy signals.

Oil Supply Surge Pressures Canadian Export Economics

The primary catalyst weighing on the Canadian Dollar remains the softness in oil markets. Reuters reports that major players including Chevron, Vitol, and Trafigura are actively negotiating US government contracts to export Venezuelan crude, potentially bringing up to 50 million barrels of accumulated inventories into the American market. This influx of international supply creates significant headwinds for Canadian heavy crude producers. With more competition in US energy markets, Canadian exporters face pressure on both volume commitments and price premiums, ultimately dampening the country’s energy sector revenues and broader currency support.

Since petroleum exports represent Canada’s economic backbone, any deterioration in oil pricing dynamics directly translates into Canadian Dollar weakness. The supply dynamics suggest this pressure may persist, keeping USD/CAD supported at current levels.

Economic Data in Focus: NFP and BoC Employment Numbers

Market participants are closely monitoring the US Nonfarm Payrolls report, which will provide crucial insights into American labor market strength and consequently the Federal Reserve’s rate trajectory. Simultaneously, Canada’s December employment figures and unemployment rate represent the domestic counterweight to watch.

The Fed’s policy path remains a key divergence point. US Treasury Secretary Scott Bessent stated on CNBC that the central bank should maintain its rate-cutting cycle, suggesting lower borrowing costs remain essential for sustained economic growth. According to CME FedWatch data, markets are currently pricing in an 86.2% probability that the Fed holds rates steady during its late January meeting—a shift that suggests reduced expectations for aggressive easing ahead.

Why These Factors Matter for USD/CAD Direction

The Canadian Dollar’s fate intertwines with multiple forces. Higher US rates attract foreign capital, boosting the USD, while the Bank of Canada’s own policy decisions determine domestic rate competition. When the Fed signals rate stability or slower cuts versus BoC easing, the differential favors the greenback. Layer in structural headwinds from commodity markets, and the path of least resistance for USD/CAD appears tilted toward continued strength near 1.3870 until fresh economic data reshapes expectations.

The coming NFP release and employment data will be instrumental in clarifying whether this current momentum persists or reverses.