USD/CAD flat lines above mid-1.3700s as softer Oil prices offset USD selling
- USD/CAD is pressured by some follow-through USD selling, though it lacks bearish conviction.
- Rising Fed rate cut bets and a positive risk tone weigh on the USD for the second straight day.
- Weaker Crude Oil prices offset hawkish BoC, capping the CAD and supporting the currency pair.
The USD/CAD pair edges lower on Tuesday and looks to extend the previous day's late retracement slide from the 1.3815 area, or its highest level since December 11. Spot prices, however, manage to hold above mid-1.3700s through the first half of the European session and currently trade nearly unchanged for the day amid mixed cues.
The US Dollar (USD) extends the overnight pullback from a nearly four-week high amid rising bets for more interest rate cuts by the US Federal Reserve (Fed), bolstered by Monday's mixed US PMIs for December. Apart from this, concerns about the central bank independence under US President Donald Trump's administration, along with a generally positive risk tone, further weigh on the safe-haven buck. This, in turn, is seen as a key factor exerting some pressure on the USD/CAD pair.
Apart from this, the Bank of Canada's (BoC) hawkish signal seems to offer some support to the Canadian Dollar (CAD), which contributes to the offered tone surrounding the currency pair. Meanwhile, expectations that the US control of Venezuela’s oil would likely increase global supplies offset geopolitical tensions and fail to assist Crude Oil prices to capitalize on Monday's recovery from a two-week low. This undermines the commodity-linked Loonie and supports the USD/CAD pair.
Traders might also refrain from placing aggressive directional bets and opt to wait for this week's important US macro releases, including the closely-watched Nonfarm Payrolls (NFP) report on Friday. The crucial data could offer more cues about the Fed's rate-cut path and influence the USD price dynamics. Apart from this, the monthly Canadian employment details, also due on Friday, should provide some meaningful impetus to the CAD and determine the USD/CAD pair's near-term trajectory.
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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