The USD/CAD pair traded in a narrow range during Asian trading on Thursday (October 8), hovering around 1.4255, not far from its highest level since April 2025 reached earlier this week. Supportive fundamentals suggest the path of least resistance for the spot price remains upward, supporting the continuation of the strong month-long uptrend. The Canadian dollar has lagged behind due to US-Canada trade tensions, a weak Canadian domestic economy, and the Bank of Canada's dovish policy stance.

Canadian dollar under pressure: US-Canada trade tensions, weak economy, and dovish central bank stance.

The Canadian dollar has lagged behind due to severe US-Canada trade tensions, a weak domestic economy, and the Bank of Canada's predominantly dovish policy stance. In fact, traders seem convinced that the Bank of Canada has less reason to raise interest rates than the Federal Reserve, as Canada's weaker economic outlook is likely to dampen broader inflationary pressures. The US-Canada trade tensions are putting pressure on the Canadian economy, and the policy divergence between the Bank of Canada's dovish stance and the Federal Reserve's hawkish position is one of the core reasons for the Canadian dollar's weakness.

Oil prices near a one-month low weakened the commodity-linked Canadian dollar.

Meanwhile, crude oil prices hovered near one-month lows as easing supply concerns offset geopolitical uncertainty, further weakening the commodity-linked Canadian dollar and providing tailwinds for the USD/CAD exchange rate against a bullish US dollar. Lower oil prices directly weakened the Canadian dollar, as Canada is a major oil exporter. Easing supply concerns—including the recovery of Persian Gulf exports to 2025 average levels—put pressure on oil prices, which in turn weighed on the Canadian dollar. While geopolitical uncertainty persisted, it failed to offset the downward pressure from the supply recovery.

The dollar index is near an 18-month high, supported by hawkish FOMC minutes.

The dollar index hovered near an 18-month high, supported by market bets on a Federal Reserve rate hike before the end of the year, aided by Wednesday's hawkish FOMC minutes. Additionally, high US Treasury yields and the risk of further escalation of tensions in the Middle East favored the safe-haven dollar. In the latest developments, the Pentagon reportedly informed US Central Command days ago that preparations for resuming major operational activity in Iran were complete, as Trump weighed the specific date for a strike. US and Israeli sources indicated that a US attack could occur before the US midterm elections or a week before the Israeli elections. Furthermore, the Saudi-led coalition stated on Wednesday that it retaliated against the Houthis, attacking more than 80 Houthi military targets in the provinces of Saada, Hodeidah, Jawf, and Marib. These developments, coupled with the divergence in policy outlook between the Bank of Canada and the Federal Reserve, validated the near-term constructive outlook for the USD/CAD pair.

Policy divergence and geopolitical risks are jointly supporting the USD/CAD exchange rate.

The divergence in policy outlook between the Bank of Canada and the Federal Reserve is a significant driver of the USD/CAD exchange rate's rise. A weaker Canadian economic outlook may dampen inflationary pressures, giving the Bank of Canada less reason to raise interest rates; meanwhile, the market is betting on a rate hike before the end of the year, supported by the hawkish FOMC minutes, providing interest rate support for the US dollar. Geopolitical risks—the possibility of the US resuming major military operations in Iran and the Saudi-led coalition's retaliation against the Houthis—further benefit the safe-haven US dollar. These factors collectively support a constructive near-term outlook for USD/CAD, keeping the pair near its highest levels since April 2025.

Summarize

The USD/CAD pair held steady around 1.4255 in Asian trading on Thursday, not far from its highest level since April 2025. The Canadian dollar was pressured by US-Canada trade tensions, a weak Canadian economy, and a dovish stance from the central bank. Oil prices near one-month lows further weakened the commodity-linked Canadian dollar. The US dollar index was near an 18-month high, supported by hawkish FOMC minutes, high US Treasury yields, and Middle East geopolitical risks. Reports of the Pentagon preparing to resume major military operations in Iran and Saudi-led coalition retaliation against the Houthis further benefited the safe-haven dollar. The divergence in policy outlook between the Bank of Canada and the Federal Reserve validated the near-term constructive outlook for USD/CAD. Going forward, attention should be paid to developments in US-Canada trade tensions, oil price movements, Canadian economic data, the Fed's interest rate path, and the evolving Middle East geopolitical situation. If the US dollar remains strong and oil prices continue to decline, USD/CAD may rise further; if oil prices rebound or Canadian data improves, the Canadian dollar may find some respite. Against the backdrop of policy divergence and geopolitical risks, USD/CAD still faces upward pressure in the short term. (USD/CAD daily chart, source: EasyForex) At 10:10 Beijing time, USD/CAD was trading at 1.4253/54.