Canadian Dollar receives support from higher oil prices
- USD/CAD depreciates as rising crude prices provide support for the Canadian Dollar.
- Renewed Middle East tensions heighten oil supply risks despite an Iran-Oman shipping agreement through the Hormuz.
- Weak ADP payrolls and steady services growth shift investor focus to upcoming Nonfarm Payrolls.
USD/CAD loses ground for the second successive day, trading around 1.4010 during the European hours on Thursday. The pair remains under pressure as the commodity-linked Canadian Dollar (CAD) draws support from rebounding crude oil prices, a crucial factor given Canada’s position as a major oil exporter. Following three consecutive days of losses, West Texas Intermediate (WTI) crude recovered to trade near $74.90 per barrel. Prices were bolstered by renewed supply concerns following a deadly Israeli airstrike in southern Lebanon targeting Hezbollah infrastructure over reported ceasefire violations.
Meanwhile, market participants are weighing geopolitical developments against potential supply additions, particularly reports of a new maritime agreement between Iran and Oman. The two nations are finalizing a joint statement regarding a temporary two-to-four-month shipping route through the Strait of Hormuz. While Tehran clarified that this measure does not signal a full reopening of the strategic waterway, the prospect of increased Middle Eastern energy flows has somewhat tempered market fears of severe supply disruptions.
On the macroeconomic front, US economic data presented a mixed picture. ADP private-sector payrolls increased by just 44,000 in July, falling sharply from June’s revised figure of 95,000 and missing expectations of 70,000. On the other hand, the ISM Services PMI pointed to steady economic momentum, edging up to 54.1 from 54.0 in June, though it slightly lagged the forecasted 54.5. Investor focus now shifts to upcoming key catalysts, notably Thursday's Initial Jobless Claims and Friday's pivotal Nonfarm Payrolls (NFP) report.
US data mix points to mild downside risks for payrolls
ING’s FX team highlights a softer tone in the latest US data ahead of Friday’s payrolls. Analysts note that “ADP payrolls came in a bit soft at 44k and ISM services rose less than expected to 54.1 yesterday,” with particular concern around the labour market signal from the survey. They point out that “the services employment subindex plummeted to 47.5, which – according to our macro team – points to some mild downside risks for tomorrow’s payrolls,” reinforcing the case for a cautious market stance going into the release.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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