Canadian Dollar holds near early June high as rising oil prices offset modest USD strength
- USD/CAD struggles to gain any meaningful traction amid a combination of diverging forces.
- Monday’s hotter Canadian inflation figures and rising crude oil prices underpin the Loonie.
- Geopolitical risks and inflation jitters lend support to the safe-haven USD and spot prices.
The USD/CAD pair struggles to build on the overnight bounce from the 200-day Simple Moving Average (SMA) support near the 1.3845 region, or the lowest level since June 3, and is seen consolidating during the Asian session on Tuesday. Spot prices currently trade around the 1.3870 zone, unchanged for the day, amid a combination of diverging forces.
Monday's hotter Canadian consumer inflation figures and rising crude oil prices continue to underpin the commodity-linked Loonie, which, in turn, acts as a headwind for the USD/CAD pair. Meanwhile, inflation risks stemming from higher oil prices, along with the US-Iran standoff, help revive demand for the safe-haven US Dollar (USD). This holds back traders from placing fresh bearish bets on the currency pair and limits the downside.
Statistics Canada reported that Canada’s headline Consumer Price Index (CPI) increased 0.5% in July and the yearly rate rose to 3%, above the 2.9% market forecast and up from 2.8% in June. Adding to this, the Bank of Canada’s (BoC) core CPI measure rose 2.3% YoY, up from 2.1%, while the monthly reading increased 0.2% following a 0.1% rise previously. However, the BoC is likely to keep its key policy rate on hold for the rest of this year.
On the geopolitical front, President Donald Trump repeated his idea of declaring the critical Strait of Hormuz as a US territory and threatened to bomb Oman if it gets in the way. Trump added that the US is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday, keeping the geopolitical risk premium in play. This, along with inflation risks stemming from higher oil prices, supports the USD.
Investors remain worried that volatile energy prices would rekindle price pressures and force the US Federal Reserve (Fed) to adopt a more hawkish stance. Hence, FOMC Minutes, due for release on Wednesday, will be looked upon for more cues about the Fed's future policy path, which will drive the USD. Apart from this, the incoming geopolitical headlines and oil price dynamics should provide some impetus to the USD/CAD pair.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair defends the 200-day SMA at 1.3848, which keeps the broader bias modestly bullish. Although downside attempts are being absorbed near the said support, a clean break beneath would be seen as a key trigger for bearish traders and open the door to a deeper correction. However, holding above it would keep the path of least resistance tilted higher in the near term.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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