Oil’s Retreat Pulls the Canadian Dollar Back From Earlier Highs

The Canadian Dollar found itself caught between two powerful forces on Monday — a weakening US Dollar on one side, and a sharp pullback in crude oil prices on the other. After making notable gains earlier in the session, the Loonie gave back much of its advance as oil prices reversed course dramatically, leaving the USD/CAD pair roughly where it started the day.


The drama began in the oil market, where prices surged at the weekly open amid escalating conflict in the Middle East, briefly touching multi-year highs above $110 per barrel. Since Canada ranks among the world’s most significant oil exporters, those early gains were a tailwind for the Canadian Dollar. A sustained $10 rise in oil prices is estimated to add roughly half a percentage point to Canadian economic growth over the following year, underscoring just how tightly the Loonie is tied to energy markets.


But the rally in crude didn’t last. Reports emerged that major Western economies are in discussions about a coordinated release of strategic oil reserves to help stabilize supply, and prices retreated sharply — falling back toward the low $90s per barrel. That reversal dragged the Canadian Dollar down with it, erasing much of the currency’s earlier strength.


The broader backdrop remains complicated. Even with the pullback, oil prices are still elevated compared to recent months, and that cuts both ways for Canada. Higher energy prices support the country’s export revenues and economic growth, but they also stoke inflation — a headache for central bankers everywhere. The Bank of Canada is widely expected to hold interest rates steady at its upcoming policy meeting, choosing to monitor how the energy-driven inflation picture develops before making any moves.


Meanwhile, the US Dollar has been trading under pressure, though not as much as might be expected. Markets have been scaling back their expectations for near-term Federal Reserve interest rate cuts, with the probability of a cut by mid-year now sitting well below where it was just a month ago. The Fed’s reluctance to ease policy amid persistent inflation concerns has lent the Dollar a degree of support, limiting how far it can fall even in a risk-sensitive environment.


Looking ahead, currency traders will have plenty of data to digest this week. Canada’s employment report lands on Friday, offering the last major snapshot of the labor market before the Bank of Canada’s March policy decision. In the United States, inflation readings on both the consumer and personal spending fronts are due mid-week and at the end of the week respectively — reports that could significantly shift expectations for where US interest rates are headed.


For now, the Canadian Dollar remains at the mercy of the oil market. As long as Middle East tensions keep energy prices volatile, expect the Loonie to swing with every headline.