USD/CAD remains stronger near 1.3650 as Oil prices decline
- USD/CAD stays firm as the commodity-linked Canadian Dollar weakens amid falling Oil prices.
- WTI drops over 5% as traders watch US–Iran talks that could ease geopolitical risk premiums.
- The US Dollar may strengthen following Kevin Warsh’s nomination as Fed Chair.
USD/CAD extends its gains for the second successive session, trading around 1.3660 during the Asian hours on Monday. The pair remains stronger as the commodity-linked Canadian Dollar (CAD) struggles amid declining Oil prices, given Canada’s status of the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price falls over 5% after four days of losses, trading around $62.00 per barrel at the time of writing. Crude Oil prices edge lower as traders keep a close watch on the United States (US)–Iran negotiations that could ease geopolitical risk premiums. Over the weekend, US President Donald Trump said the United States “hopefully” would reach a deal with Iran, after Supreme Leader Ayatollah Ali Khamenei warned that a US attack could trigger a wider regional conflict.
The USD/CAD pair may further strengthen as the US Dollar could receive support from rising cautious sentiment surrounding the Federal Reserve (Fed) policy outlook, following US President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair, which markets view as signaling a more disciplined and cautious approach to monetary easing.
Fed officials also struck a patient tone. St. Louis Fed President Alberto Musalem said further rate cuts are not warranted, describing the 3.50%–3.75% policy range as broadly neutral, while Atlanta Fed President Raphael Bostic reiterated that policy should remain modestly restrictive.
The Greenback also gained support as risk sentiment improved after the US Senate reached an agreement to advance a government funding package, thereby averting a shutdown, according to Politico.
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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