## North American Currency Pair Weakens as Energy Market Rallies on Geopolitical Risk

The USD/CAD exchange rate is experiencing downward pressure for a consecutive second day, hovering near the 1.3660 level during Asian trading Monday. The pairing has remained constrained around a five-month trough of 1.3642, initially established on December 26. Supporting the commodity-sensitive Canadian Dollar is a resurgence in crude valuations, particularly given Canada's role as America's preeminent petroleum supplier.

### Energy Market Strengthens Amid Regional Tensions

West Texas Intermediate crude has recovered ground following a 2.5% pullback in the prior session, now trading around $57.20. The recovery in oil valuations stems from heightened geopolitical concerns in the Middle East, including reported airstrikes in Yemen and escalating rhetoric from Iran regarding conflict with Western nations and regional allies. These developments have sparked apprehension regarding potential supply chain disruptions. For currency pairs involving the Canadian Dollar, rising petroleum prices typically correlate with strengthening valuations, as Canada exports the largest volume of crude to the United States.

### US Dollar Under Pressure from Rate-Cut Expectations

The weakness in USD/CAD reflects mounting speculation surrounding additional monetary easing from the Federal Reserve through 2026. Market participants are anticipating the release of December's Federal Open Market Committee (FOMC) meeting minutes, scheduled for Tuesday, which could provide transparency regarding policymakers' economic assessments for the coming year.

The Federal Reserve executed a 25 basis-point rate reduction at its December session, establishing the current target band at 3.50–3.75%. Throughout 2025, the central bank delivered cumulative relief of 75 basis points as labor market conditions softened and inflationary pressures remained elevated. According to CME FedWatch probabilities, there is an 81.7% likelihood of rates being maintained at the January meeting, an increase from 77.9% observed seven days prior. The probability of another 25 basis-point cut has diminished to 18.3%, down from 22.1% one week earlier.

### Drivers of Canadian Dollar Movement

The Bank of Canada (BoC) influences currency valuations principally through interest rate adjustments, which affect lending conditions across financial institutions. The BoC's mandate centers on sustaining inflation within a 1–3% band through strategic rate modifications. Elevated interest rate environments generally attract foreign capital inflows, bolstering local currency demand.

Beyond monetary policy, petroleum valuations represent perhaps the most direct factor affecting Canadian Dollar strength. As Canada's dominant export commodity, crude price movements create immediate ripple effects through the currency market. Ascending oil values typically signal increased aggregate demand for the Canadian Dollar, while declining prices produce the inverse effect. Strengthened oil markets frequently accompany positive trade balance scenarios, further supporting the currency.

Macroeconomic indicators—encompassing GDP growth, manufacturing and service activity indices, employment figures, and consumer confidence metrics—provide insight into economic vitality and influence currency trajectories. Robust economic fundamentals typically attract greater international investment and may prompt the BoC toward rate increases, reinforcing currency appreciation. Conversely, deteriorating economic signals generally weigh on the Canadian Dollar. The broader US economic landscape, given America's standing as Canada's principal trading counterpart, equally shapes currency dynamics.