USD/CAD edges higher to near 1.3750 due to geopolitical risks
- USD/CAD rises as safe-haven demand increases on renewed geopolitical risks.
- US captured Venezuelan President Nicolas Maduro, with Trump saying Washington would oversee a safe, orderly transition.
- The commodity-linked CAD may strengthen amid potential gains in Oil prices.
USD/CAD extends its gains for the second successive session, trading around 1.3750 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) strengthens on safe-haven demand, driven by a renewed rise in geopolitical risks following the United States’ (US) capture of Venezuelan President Nicolas Maduro. US President Donald Trump said that the US would oversee Venezuela until a safe, orderly, and judicious transition could take place, per CNN.
The Guardian reported on Monday that President Trump warned Washington could launch a new military intervention if Venezuela’s interim president, Delcy Rodríguez, failed to meet US demands. He also made remarks about Colombia’s leadership, floated the idea of “Operation Colombia,” criticized Mexico for not getting its act together, and suggested Cuba appeared close to collapse.
Traders expect two additional Federal Reserve rate cuts in 2026. Federal Open Market Committee (FOMC) December Meeting Minutes suggested that most participants judged that it would likely be appropriate to stand on further rate cuts if inflation declined over time. Markets are bracing for US President Donald Trump to nominate a new Fed chair to replace Jerome Powell when his term ends in May, a move that could tilt monetary policy toward lower interest rates.
The upside of the USD/CAD pair could be capped as the commodity-linked Canadian Dollar (CAD) could strengthen on potential gains in Oil prices. However, West Texas Intermediate (WTI) Oil price remains steady after experiencing volatility, trading around $57.20 per barrel at the time of writing.
Traders evaluated the fallout from the US attack on Venezuela, with markets weighing risks to regional crude supply. However, some analysts expect limited disruption, noting Venezuela produces under 1 million barrels per day, less than 1% of global output.
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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