USD/CAD pulls back to near 1.3700 as Oil prices rebound
- USD/CAD eases as the commodity-linked Canadian Dollar strengthens on recovering Oil prices.
- WTI upside may be capped as the US and Iran agreed to hold talks in Oman on Friday.
- The US Dollar Index stays near two-week highs as markets price a slower pace of potential Fed rate cuts.
USD/CAD remains steady after paring daily gains, trading around 1.3700 during the Asian hours on Friday. The pullback reflects support for the commodity-linked Canadian Dollar (CAD) as Oil prices recover. West Texas Intermediate (WTI) Oil price has rebounded to around $63.50 at the time of writing, though upside may be capped after the United States (US) and Iran agreed to hold talks in Oman on Friday.
Tehran is expected to focus discussions on its long-running nuclear dispute with Western powers, while Washington wants talks to also cover Iran’s ballistic missile program, regional proxy support, and human rights issues.
The USD/CAD pair may regain its ground as the US Dollar Index (DXY) remains near two-week highs, supported by the slowing pace of potential Federal Reserve (Fed) rate cuts. Fed Governor Lisa Cook said she would not back another cut without clearer evidence that inflation is easing, stressing greater concern over stalled disinflation than labor market weakness.
Investors also weighed the implications of Kevin Warsh’s nomination as Fed chair, citing his preference for a smaller balance sheet and a less aggressive approach to rate reductions. The nomination also eased concerns about the Fed’s independence.
Meanwhile, a run of US labor data this week signaled a cooling job market, reinforcing dovish Fed expectations. Markets now price two rate cuts this year, starting in June, with another possibly in September.
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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