Two main groups of factors typically shape the trajectory of the USDCAD pair. External drivers include energy price dynamics and the broader geopolitical landscape, while internal ones focus more on macroeconomic conditions and central bank decisions.
Neither group is currently working in favor of the Canadian dollar. Let’s dive deeper into the context.
1) Crude prices
Canada is one of the world’s largest energy exporters, making its economy highly sensitive to fluctuations in the oil market. This creates a well-established inverse correlation: when crude quotes fall, USDCAD tends to rise, and vice versa. This pattern is considered to be one of the most consistent and statistically significant in the Forex market.
But what hurts CAD the most now is visible progress in the US-Iran nuclear talks, underscored by recent remarks from Oman's Foreign Minister. According to his statement, the parties have made significant strides toward a peaceful resolution, with negotiations expected to resume next week.
If Washington and Tehran manage to reach an agreement or establish interim arrangements, the geopolitical risk premium embedded in oil prices is likely to dissipate, sending crude lower. Through the resulting domino effect, the loonie would weaken, pushing USDCAD higher.
2) Monetary policy split
Canada's economic engine is currently flashing warning lights. The latest data points to a broad-based softening, and the key numbers are becoming too loud to ignore.
January's inflation reading cooled to 2.3%—a welcome sign that price pressures are finally relenting and bringing the target zone into view. But here's where the story gets complicated. Such a reprieve comes amid grim growth prospects, including lackluster GDP projections for the fourth quarter (Q4) of 2026 and December's underwhelming 0.1% month-over-month gain. Together, they paint a picture of the Bank of Canada (BoC) facing deepening strain.
With the economy losing momentum and inflation moderating, the stage is set for more aggressive monetary easing. The regulator may have little choice but to pick up the pace if it wants to keep the GDP from stalling out.
Lower rates would deal another blow to the Canadian dollar. When yields shrink, the loonie becomes less appealing to income-hungry investors. As a result, the currency pair appears ready to grind higher from here.
The overall recommendation is to buy USDCAD at the current price, with 1.38800 in view. In order to mitigate potential risks, place a Stop Loss order 1% below your entry point.
This content is for informational purposes only and is not intended to be investing advice.
