USD/CAD rises amid US-China trade optimism, weaker Oil prices
- Risk sentiment improves on signs of easing US-China trade tensions.
- The US Dollar stabilizes ahead of delayed inflation data.
- Persistently low Oil prices continue to weigh on the Canadian Dollar.
USD/CAD trades slightly higher on Monday, up 0.10% for the day to around 1.4030 at the time of writing. The pair gains support as the US Dollar (USD) steadies, benefiting from a gradual recovery in risk appetite across global markets due to the US and China easing tensions, while the Canadian Dollar (CAD) remains pressured by falling Oil prices.
Investors welcome signs of de-escalation in the US-China trade conflict. US President Donald Trump acknowledged on Friday that imposing 100% tariffs on Chinese imports would not be sustainable, indicating that a reduction is possible if Beijing “does things for us too.”
US Treasury Secretary Scott Bessent confirmed that he will meet Chinese Vice Premier He Lifeng this week, ahead of a potential summit between Trump and Chinese President Xi Jinping in South Korea later this month. These developments have fueled hopes that the two largest economies will reach a trade deal, improving overall market sentiment.
Domestically, concerns over the health of US regional banks have subsided after strong quarterly earnings from major lenders, which have further supported risk appetite. However, the US Dollar remains subdued ahead of the release of the September Consumer Price Index (CPI), delayed to Friday due to the US government shutdown.
The report will be crucial in shaping expectations for the Federal Reserve’s (Fed) monetary policy outlook. According to the CME FedWatch tool, markets have fully priced in a 25-basis-point interest rate cut at the October meeting.
In Canada, investors will monitor Monday’s publication of the Industrial Product Price (IPP) index and the Raw Material Price index for September, though market attention remains focused on Tuesday’s Consumer Price Index (CPI) data.
The figures will be key for shaping expectations ahead of the Bank of Canada’s (BoC) monetary policy decision on October 29, following its rate cut to 2.5% in September. Softer inflation could strengthen the case for further monetary easing, while a higher-than-expected CPI reading would limit the central bank’s room for maneuver.
Meanwhile, the Canadian Dollar continues to suffer from lower Oil prices. West Texas Intermediate (WTI) US Oil falls 0.80% on Monday at the time of writing, trading below $57, near Friday’s five-month low of $56.15. Persistent concerns about global oversupply continue to pressure Oil markets and, consequently, the commodity-linked Loonie.
In this context, the relative performance gap between the two currencies still favors USD/CAD, as expectations for Fed rate cuts are largely priced in, while weak energy prices constrain the Canadian Dollar’s potential rebound.
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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