Why Is the Canadian Dollar Retreating Below 1.3660 Against the US Dollar Amid Oil Rally?

The USD/CAD pair continues its downward trajectory for a second consecutive trading day, hovering near 1.3660 during Monday’s Asian trading session. The currency pair remains under pressure close to its five-month trough of 1.3642, recorded on December 26. This weakness in the US Dollar relative to the Canadian Dollar stems from the broader commodity complex, where crude oil has emerged as a key driver of market sentiment.

Oil Surge and Geopolitical Risks Bolster CAD

West Texas Intermediate crude has recovered ground, now trading around $57.20 per barrel following a 2.5% pullback in the previous session. The rebound in oil prices reflects escalating tensions across the Middle East, with Saudi military operations in Yemen and Iran’s announcement of escalatory measures intensifying concerns about potential supply disruptions. As the world’s largest crude exporter to North America, Canada’s economic fortunes are closely tied to petroleum markets, making the Canadian Dollar particularly sensitive to oil price movements. When crude strengthens, the Canadian currency benefits from improved export revenue prospects, creating upside pressure on the CAD. This relationship explains why the Canadian dollar rate in Pakistan and other emerging markets tends to appreciate during periods of energy-driven risk premiums.

Federal Reserve Rate Cut Expectations Pressuring the Greenback

The US Dollar faces headwinds from anticipations surrounding monetary policy. Market participants are pricing in the possibility of two additional rate cuts by the Federal Reserve throughout 2026, weighing on USD performance. The Fed previously delivered a 25-basis-point reduction in December, bringing the benchmark rate range to 3.50%-3.75%. Over the full year 2025, the central bank implemented cumulative cuts totaling 75 basis points, responding to a softening labor market and persistent inflationary pressures.

According to the CME FedWatch tool, expectations have shifted notably, with an 81.7% probability of rates remaining unchanged at the Fed’s January meeting, up from 77.9% a week prior. The likelihood of a quarter-point cut has correspondingly declined to 18.3% from 22.1%. Traders will closely monitor Tuesday’s release of the Federal Open Market Committee’s December meeting minutes for clues regarding the policymaking committee’s strategic direction for the coming year.

Understanding Canadian Dollar Dynamics

The Bank of Canada plays a pivotal role in determining the Canadian Dollar’s trajectory through its interest rate decisions. Higher rates generally attract foreign capital seeking better returns, simultaneously strengthening the currency and improving the Canadian dollar rate in Pakistan relative to emerging market benchmarks. Inflation dynamics also influence the CAD, as elevated price pressures typically prompt the BoC to raise rates, creating a positive feedback loop for the currency.

Beyond monetary policy, the Canadian Dollar’s valuation reflects multiple economic indicators including GDP growth, employment figures, manufacturing and services activity, and trade balances. A robust economy attracts foreign investment and may encourage BoC rate hikes, both of which support currency appreciation. Conversely, weak economic data typically results in CAD depreciation as investor confidence wanes and growth concerns mount.

The strong correlation between crude oil prices and Canadian Dollar performance underscores the importance of commodity markets in driving currency movements, particularly for commodity-exporting nations. As Middle East tensions persist and oil markets remain volatile, the CAD is likely to remain sensitive to petroleum price swings and broader geopolitical developments.