Why Oil Prices Are Pushing USD/CAD Higher—And What's Next for This Week

The USD/CAD pair is consolidating strength around 1.3870 during Asian trading on Friday, with traders closely watching two major catalysts: the US jobs report and fresh labor data from Canada. For those tracking the conversion, 41 USD translates to roughly 56.87 CAD at current levels, illustrating how significantly the exchange rate has shifted this week.

Oil’s Weakness Is The Real Story Behind USD/CAD’s Strength

The immediate driver isn’t complicated—it’s energy. As crude prices weaken, the Canadian Dollar finds itself under pressure because energy exports are Canada’s economic lifeblood. Think of it this way: when oil drops, it directly shrinks export revenues and dampens economic optimism north of the border. That’s bearish for the CAD.

What’s amplifying this pressure right now is supply-side disruption. Reuters reports that major oil firms including Chevron, along with global traders Vitol and Trafigura, are competing for US government contracts to export Venezuelan crude. The potential influx of up to 50 million barrels from PDVSA’s stockpiles could further depress prices, as additional supply enters an already soft market. For Canada’s energy sector, this is a headwind—more competition, lower prices, squeezed margins.

The Fed’s Next Move Could Reshape The Trade

Meanwhile, in Washington, US Treasury Secretary Scott Bessent is making his case: the Federal Reserve should keep cutting rates. In a CNBC interview Thursday, he argued that lower rates are missing from an otherwise strong economic growth picture.

Here’s where it gets interesting for USD/CAD traders. The CME FedWatch tool shows markets are pricing an 86.2% probability that the Fed holds steady at its January 27-28 meeting. But Bessent’s dovish positioning suggests future rate cuts remain on the table. Lower US rates would normally weigh on the USD, but in this case, it could be offset by CAD weakness from oil—creating a mixed picture for the pair.

What To Watch This Week

Two employment reports matter:

• US Nonfarm Payrolls (NFP): The headline jobs number will shape Fed expectations
• Canada’s December Employment Data: Any weakness here adds to CAD selling pressure

If US jobs remain resilient and Canadian employment disappoints, USD/CAD could test higher levels.

Understanding The Canadian Dollar’s True Drivers

The Bank of Canada’s interest rate decisions are foundational. Higher BoC rates traditionally support the CAD, while rate cuts do the opposite. The central bank targets 1-3% inflation and adjusts rates accordingly.

But here’s what often gets overlooked: inflation itself now works differently than it did decades ago. Modern inflation typically triggers rate hikes, which attract foreign capital seeking better yields—that’s supportive for the currency. Weak inflation, conversely, encourages rate cuts and capital outflows.

Beyond rates and oil, macroeconomic data matters enormously. GDP reports, PMIs, and employment figures all signal economic health. A strong Canadian economy attracts investment and could prompt BoC rate hikes; a weak one sends the CAD lower.

The US economy’s health is equally critical since America is Canada’s largest trading partner. When US growth accelerates, demand for Canadian exports and the Canadian Dollar rises.

Trade balance dynamics also play a role—positive trade balances (exports exceeding imports) support currency strength, while deficits do the opposite.

Finally, risk sentiment shapes flows. During risk-on environments, investors favor higher-yielding assets and emerging market currencies, which benefits the CAD. Risk-off periods see money fleeing to safe havens like the US Dollar, pressuring the Canadian Dollar.

The Bottom Line: USD/CAD is holding above 1.3850 because oil weakness outweighs other factors. Unless crude prices stabilize or Canadian employment data surprises to the upside, expect the pair to remain elevated heading into this week’s NFP release.