Canadian Dollar Pressured as Oil Weakness Weighs—What's Driving USD/CAD Above 1.3850?

Understanding what moves the USD/CAD pair requires looking beyond the exchange rate itself. At current levels around 1.3870, the Canadian Dollar faces headwinds that deserve closer examination. For reference, 48 USD to CAD converts to approximately 66.5 CAD at present rates, illustrating how currency movements impact real-world transactions.

The Oil Factor: Canada’s Economic Achilles Heel

The Canadian Dollar’s recent struggles trace directly to crude oil weakness. Since petroleum ranks as Canada’s largest export, any drop in Oil prices immediately undermines CAD strength. Here’s the mechanics: lower Oil demand reduces export revenues, which typically narrows Canada’s Trade Balance and dampens overall economic sentiment. Adding pressure, Venezuelan crude shipments to the US market—potentially reaching 50 million barrels through companies like Chevron, Vitol, and Trafigura—threaten Canadian heavy crude pricing and export competitiveness.

This supply competition creates a ripple effect. With greater competition for US buyers, Canadian oil producers face margin compression. Energy-dependent export revenues decline, which historically has been one of the few consistent catalysts for CAD appreciation.

US Economic Signals Trump BoC Moves

Meanwhile, traders are parsing two key labor reports. The US Nonfarm Payrolls (NFP) release will reshape Federal Reserve rate expectations, while Canada’s December Employment data matters less for immediate market moves. Treasury Secretary Scott Bessent’s recent comments—arguing the Fed should cut further—highlight the policy divergence working against the Canadian Dollar.

Current market pricing via CME FedWatch shows an 86.2% probability the Fed holds rates steady at January 27–28, but this baseline itself constrains CAD upside. Higher US rates relative to Bank of Canada rates typically favor USD strength.

What Actually Moves the Canadian Dollar

The Bank of Canada influences CAD by setting interbank lending rates; higher rates attract capital inflows and strengthen the currency. However, inflation dynamics complicate this. Modern currency markets show that higher inflation can paradoxically strengthen a currency—central banks raise rates in response, pulling in global investors seeking better returns. This creates increased demand for the local currency.

Macroeconomic health also matters. GDP growth, PMI data, and employment figures all signal economic vigor, which attracts foreign investment and may prompt the BoC to hike—both positive for CAD. Conversely, weak data spurs currency weakness.

Trade Balance—the difference between exports and imports—remains structurally important. A surplus supports the currency; deficits pressure it downward.

The Current Setup for USD/CAD

With Oil prices struggling, Venezuelan competition intensifying, and the Fed’s rate path offering no near-term cuts, the USD/CAD pair has clear structural support above 1.3850. Until either crude rebounds sharply or Bank of Canada signals aggressive rate cuts, Canadian Dollar weakness versus the US Dollar appears likely to persist.