Canadian Dollar heads for fourth weekly gain on weaker US Dollar, elevated Oil prices
- USD/CAD extends its decline, reaching its lowest level since mid-May.
- Reduced Fed rate-hike expectations and concerns over US institutional credibility weigh on the Greenback.
- Stronger Canadian Retail Sales and a pause in planned US tariffs add to the Loonie’s strength.
USD/CAD extends its decline on Friday as broad US Dollar (USD) weakness and elevated Oil prices provide a double boost to the Canadian Dollar (CAD). At the time of writing, the pair trades around 1.3745, while the Loonie is on track for a fourth consecutive weekly gain.
The Greenback came under heavy selling pressure after the US Treasury announced that it would double its liquidity-support buybacks for longer-dated government securities to at least $4 billion per operation.
According to TD Securities, the Dollar was already on the cusp of a shift in sentiment, with the “USD…one breath away from its bearish turn after muted CPI and negative retail sales July data.” The bank argues that “rising US institutional credibility concerns and risk of financial repression after the UST buyback announcement” have now “cemented the prevailing bearish USD momentum.”
Fading expectations of a Federal Reserve (Fed) rate hike following a run of softer US economic data add to the pressure on the US Dollar. According to the CME FedWatch Tool, markets currently price in around a 65% probability that the central bank will keep rates unchanged next month.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 98.75, near three-month lows.
Meanwhile, the US-Iran stalemate keeps Oil prices elevated, a favourable backdrop for the currency of major crude exporter Canada. West Texas Intermediate (WTI) Oil trades around $86.70 per barrel and is heading for a weekly gain of more than 6%. The Loonie also benefits after US President Donald Trump announced a three-day pause on planned 50% tariffs on Canadian imports.
On the data front, Retail Sales in Canada rose 0.6% in June, beating expectations for a 0.4% gain. Excluding autos, sales increased 0.5%, also beating the 0.4% forecast, although both figures were below the previous month’s readings.
Traders now await the preliminary US S&P Global Purchasing Managers Index (PMI) report for August, scheduled for release later during American trading hours.
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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