USD/CAD remains subdued near 1.3950 as Oil prices rise
- USD/CAD struggles as the CAD receives support from higher Oil prices.
- WTI price appreciates after OPEC+ announced a smaller-than-expected production hike.
- CME FedWatch Tool prices in 95% odds of an October Fed cut and 84% for December.
USD/CAD remains subdued for the second successive session, trading around 1.3950 during the Asian hours on Monday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) gains ground amid higher Oil prices. It is worth noting that Canada is the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil price is trading $61.50 per barrel at the time of writing. Crude Oil prices gain ground after the Organization of the Petroleum Exporting Countries and its allies, including Russia, known as OPEC+, announced a smaller-than-expected production hike, easing concerns over rising supply. The group agreed on Sunday to increase output by 137,000 bpd in November—matching October’s modest rise and falling short of earlier expectations.
The USD/CAD pair further depreciates as the US Dollar (USD) may face challenges due to the rising likelihood of the US Federal Reserve (Fed) rate cuts in the upcoming meetings. The CME FedWatch Tool suggests that markets are now pricing in a 95% chance of a Fed rate cut in October and an 84% possibility of another reduction in December.
The upside of the Greenback could be restrained as traders adopt caution after United States (US) Senators failed to pass spending proposals to reopen the federal government for a fourth time, extending the ongoing shutdown into a new week. The closure has suspended key federal programs and delayed major economic reports, including September’s jobs data originally due Friday.
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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