US Dollar Weakness, and Oil Pressure Backs Canadian Dollar

The Canadian dollar (CAD), also known as the “loonie,” has long been recognised as a commodity-linked currency, primarily due to Canada’s position as a major exporter of natural resources, such as crude oil and natural gas. Several market events over the past months have emphasized this relationship. For example, during the heightened geopolitical tensions surrounding the Israel-Iran conflict, the loonie surged to an eight-month high, highlighting how global energy dynamics directly influence its performance. Like most currencies, the CAD is also shaped by the performance of the U.S dollar, especially considering its position as the world’s reserve currency. These factors highlight the link between commodities, global capital flows, and currency performances. Here’s a look at how it works.

The Oil CAD Connection

Crude oil and the Canadian dollar have a long history, primarily due to Canada’s status as one of the world’s top oil exporters. As of 2022, the country’s daily oil production equalled $5.57 million barrels. Its economy is also heavily reliant on the energy sector, contributing approximately $105 billion to its GDP as of 2020. So naturally, it’s expected that when oil prices rise, Canada’s export revenue increases, positively influencing its trade balance. Conversely, falling oil prices usually weigh on the currency and dampen its growth outlook. The United States is Canada’s primary oil importer, with about 97% of its supply being diverted to the country. Others, such as the United Kingdom, Germany, China, and France, also receive a small supply of its exports.

Macro Themes That Shape CAD Performance

Commodity Strength

Since the United States is Canada’s biggest crude oil buyer, the Canadian dollar (loonie) often rises in value against the U.S. dollar when oil prices increase. Crude oil exports bring a large flow of U.S. dollars into Canada, so changes in oil prices directly affect how many U.S. dollars move into the Canadian economy. When prices are high, the amount of USD that Canada earns from its exports automatically also increases.

Crude oil isn’t the only commodity from which the CAD also benefits. Recent analysis from FX Street shows that USD/CAD pulled back on August 26, following demand for commodity-related currencies, despite recent declines in oil market performance. The rising performance of precious metals also supports the CAD. Gold and Silver have had decent performances, with Silver breaking out of a bull flag formation in mid-July and Gold reaching a record high of $3,347 in early August.

Commodity-linked currencies are typically in high demand because they serve as safe-haven assets beneficial in unstable market conditions. This explains the recent USD/CAD exchange rate pullback on the TradingView forex trading app.

Global Flows

The U.S. economy also plays a significant role in shaping the Canadian dollar’s (CAD) performance. Beyond its influence on Canada’s energy sector, the U.S. dollar’s status as the world’s reserve currency drives global sentiment and affects how most currencies, including the loonie, are valued. This means that U.S. political and economic decisions often have a ripple effect across markets. A clear example was during the height of recent tariff wars, when CAD and other G10 currencies reacted sharply to U.S. trade policies. While Canada has hinted at progress in securing new tariff terms, no final compromise has been reached. In the meantime, the Canadian economy has felt the strain, with exports to the U.S. falling by 26% and an estimated 54,000 manufacturing jobs lost between January and May 2025. Such developments underscore the significant impact on Canada’s economy and currency, which depend on U.S. decisions.

This dependency also has advantages, especially when the U.S. dollar is under pressure. Other factors, such as investor sentiment, Federal Reserve policy, and U.S. bond yields, also shape the flow of global capital. At present, the U.S. dollar is underperforming, following President Trump’s dismissal of Federal Reserve Governor Lisa Cook. While the U.S. struggles with these challenges, one dynamic remains consistent: a weaker U.S. dollar often translates into stronger performances for commodity-linked currencies, such as the Canadian dollar.

How Macro Themes Shape Market Clarity

As in forex trading, traders can become more confident in executing the trade when multiple technical indicators confirm the same prediction. In this context, macroeconomic factors, such as commodities and global flows, are the indicators. If commodity strength and global flows both point in the same direction, it provides a clear and reliable view of CAD’s likely path. Additionally, there is increasing confidence in a sustained CAD rally among many analysts.

Prioritising Macroeconomic Factors In Analysis

Macroeconomic factors are highly relevant to the financial markets, as the points we’ve made in this article make clear. Learn to prioritize watching economic and political factors like this and understand how they could ultimately benefit your investments and long-term trading outcomes. The Canadian dollar is a currency worth watching in the coming months, particularly given its ongoing positive performance in the global commodities market.

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