Canadian Dollar advances due to softer US Dollar, higher oil prices
- USD/CAD depreciates as a slew of softer US data led traders to dial back Fed rate hike bets.
- US Retail Sales fell 0.6% in July, lowering market expectations for upcoming Fed rate hikes.
- Elevated Middle East tensions and new US sanctions on Iran drove crude oil prices higher over the weekend.
USD/CAD extends its losses for the third consecutive day, trading around 1.3870 during the Asian hours on Monday. The pair depreciates as the US Dollar (USD) declines amid weaker-than-expected US economic data and shifting central bank expectations.
US Census Bureau reported on Friday that Retail Sales fell by 0.6% month-over-month in July, following a 0.2% rise in June, coming in below the market consensus of 0.1% growth. On an annual basis, Retail Sales rose 5.0% in July compared to 6.8% in the previous month.
Traders have reduced their bets on Federal Reserve rate hikes following a slew of softer US data, including CPI, PPI, and Retail Sales. Markets are now pricing in a 33.1% chance of a rate hike next month, down from 44% last week according to the CME FedWatch tool.
The USD/CAD pair faces challenges as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices. West Texas Intermediate (WTI) oil price continues to gain for the second consecutive day, trading around $81.80 per barrel at the time of writing. Crude oil prices advance as elevated tensions in the Middle East kept markets wary of further supply disruptions. Over the weekend, Israel launched fresh strikes on Lebanon that killed 11 people, including a senior Hezbollah commander.
Oil market braces for deeper supply shortfall as Gulf outages mount
Commerzbank warns that the disruption to output in the Gulf is materially tightening the global balance, with its analysts estimating that “due to significant production losses in the Gulf region, total supply is expected to fall by 4.3 million barrels per day, meaning the oil market will be significantly undersupplied this year.” Citing the latest projections from the IEA, the bank notes that “the supply deficit in the third quarter stands at 1.8 million barrels per day. This is 1 million barrels per day more than previously expected,” underscoring how quickly the perceived shortfall has widened.
Meanwhile, US President Donald Trump is preparing new economic sanctions aimed at forcing Iran to surrender, as pressure mounts on his administration to bring the military campaign to an end. The situation remains fragile as the interim ceasefire agreement between the US and Iran is set to formally expire later in the day, while negotiations to resolve the conflict and reopen the Strait of Hormuz remain deadlocked.
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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