Oil Weakness Keeps USD/CAD Near 1.3870 as Markets Await January US Labor Report

The USD/CAD currency pair is consolidating gains around the 1.3870 level on Friday’s Asian trading session, sustained by persistent headwinds on the Canadian Dollar side. Investors are now focused on two major catalysts: the imminent US Nonfarm Payrolls (NFP) data release and Canada’s December employment figures. These labor market metrics will provide crucial signals about monetary policy trajectories on both sides of the border.

Oil Supply Shift: A Bearish Setup for the Canadian Dollar

The weakening Canadian Dollar reflects broader pressure from crude oil market dynamics. Increased Venezuelan crude supplies entering the US market have become a critical factor. Major energy traders including Chevron, Vitol, and Trafigura are competing for government contracts to commercialize approximately 50 million barrels from Venezuela’s PDVSA inventories. This supply influx threatens to displace demand for Canadian heavy crude exports, compressing price premiums and constraining revenues for Canadian energy producers.

For the loonie, this represents a structural headwind. Since petroleum ranks among Canada’s top export categories, declining crude valuations directly compress the nation’s export earnings and weaken its currency. The potential for sustained crude pressure suggests USD/CAD strength could persist beyond the immediate trading session.

Fed Rate Cuts: Missing Ingredient for Growth?

US Treasury Secretary Scott Bessent recently signaled on CNBC that the Federal Reserve should pursue additional rate reductions, positioning lower borrowing costs as a prerequisite for accelerated economic expansion. However, current market expectations tell a different story. CME FedWatch data indicates an 86.2% probability the Fed will maintain its current policy stance during the January 27-28 meeting—a stance that could support the US Dollar if confirmed.

The contrast between official commentary and market pricing creates uncertainty heading into the NFP release. A stronger-than-expected employment figure could cement the Fed’s patient approach, providing support for USD strength relative to commodity-linked currencies like the Canadian Dollar.

Understanding Canadian Dollar Drivers: Why Oil, Rates, and Economics Matter

The Canadian Dollar’s trajectory depends on a convergence of factors operating simultaneously. The Bank of Canada (BoC) exerts primary influence through its overnight rate-setting decisions—the benchmark that filters down to consumer and business lending rates. By maintaining inflation within its 1-3% target band, the BoC shapes investor perceptions of real returns.

Oil price movements act as a barometer for Canadian export competitiveness. Rising crude strengthens the currency by boosting export receipts and signaling robust commodity demand. Conversely, declining oil squeezes the terms of trade and suppresses the loonie. Today’s Venezuelan supply dynamic exemplifies this mechanism in real-time.

Economic health indicators—GDP growth, PMI readings, employment trends, and consumer confidence surveys—all influence whether the BoC will adjust its policy stance. A resilient economy typically attracts foreign capital seeking higher returns, increasing demand for Canadian Dollar deposits and investments. Weak data often triggers currency depreciation as the central bank signals rate cuts or sustained accommodation.

Broader risk sentiment also matters. During periods when investors embrace riskier assets (risk-on environments), commodity currencies like the Canadian Dollar typically outperform. Risk-off episodes see capital fleeing toward safe havens, pressuring the loonie.

Finally, US economic conditions cannot be overlooked—as Canada’s primary trading partner, American growth and policy shifts cascade through Canadian markets. Strong US data supporting Federal Reserve tightness or robust dollar demand typically weighs on USD/CAD’s Canadian counterpart.

The converging pressures on Canadian crude exports, combined with mixed Fed signals and upcoming employment data, will determine whether the USD/CAD pair continues consolidating above 1.3870 or breaks to fresh levels in coming sessions.