USD/CAD stays above 1.3900 due to lower Oil prices
- USD/CAD holds ground as the commodity-linked CAD struggles amid declining Oil prices.
- WTI price falls as OPEC+ signaled a larger output increase for next month.
- The CME FedWatch Tool indicates the pricing in a 97% chance of a Fed rate cut in October.
USD/CAD moves sideways after registering gains in the previous session, hovering around 1.3920 at the time of writing during the European hours on Wednesday. The USD/CAD pair may appreciate as the commodity-linked Canadian Dollar (CAD) could face challenges amid declining Crude Oil prices. It is worth noting that Canada is the largest Oil exporter to the United States (US). Canada’s S&P Global Manufacturing Purchasing Managers’ Index (PMI) and BoC Summary of Deliberations will also be eyed later in the North American session.
West Texas Intermediate (WTI) extends its losing streak, trading around $61.80 per barrel at the time of writing. Oil prices fall as the Organization of the Petroleum Exporting Countries and its allies, including Russia, known as OPEC+, signaled a larger output increase for next month, while uncertainty over a potential US government shutdown raised concerns about economic activity and fuel demand.
However, the US Dollar (USD) faces challenges after the latest jobs figures from the United States (US), which boosted the likelihood of further Federal Reserve (Fed) rate cuts in 2025. The CME FedWatch Tool suggests that markets are now pricing in nearly a 97% chance of a Fed rate cut in October and a 76% possibility of another reduction in December. Traders are likely to await September’s US ADP Employment Change and ISM Manufacturing PMI data later in the day, though their release could be disrupted by the government shutdown.
The US government has entered a shutdown, leaving about 750,000 federal employees furloughed after Congress failed to pass funding bills. The Labor Department warned Monday that its statistics agency would halt data releases—including Friday’s key monthly jobs report—if the partial shutdown continues.
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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