Canadian Dollar moves little despite weaker US Dollar, higher oil prices
- USD/CAD may depreciate as rising crude prices could support the Canadian Dollar.
- Middle East tensions and Strait of Hormuz transit restrictions push WTI crude back toward $90 per barrel.
- Goldman Sachs noted a benign CPI reading could prevent the Fed from raising interest rates.
USD/CAD remains steady after registering modest gains in the previous day, trading around 1.3830 during Asian hours on Monday. However, the pair could face downside pressure as the commodity-linked Canadian Dollar (CAD) may gain support from rising crude oil prices, given Canada's position as a leading crude exporter.
West Texas Intermediate (WTI) rebounded toward $90.00 per barrel following recent military strikes between the United States (US) and Iran. The conflict escalated over the weekend when the US targeted three Iranian tankers following missile attacks on American warships, prompting Tehran to declare a new restricted zone around the Strait of Hormuz.
Canadian Dollar support fades as data surprises overshadow BoC hawkish tilt
According to TD Securities, the latest labour market data on both sides of the border has shifted the balance of risks against the Canadian Dollar. The bank notes that “the genuine upside surprise in US payrolls and downside surprise in Canada was enough to overwhelm the temporary support from the BoC's hawkish tilt,” leaving the Loonie vulnerable to underperformance even as the central bank maintains a more assertive policy stance.
Labor market data from the US Bureau of Labor Statistics showed Nonfarm Payrolls increasing by 162,000 in August, comfortably beating expectations of 56,000, while the Unemployment Rate held steady at 4.1%. Although the greenback remains soft, its losses may be capped as traders price in higher odds of monetary tightening; the CME FedWatch tool now reflects a 58.3% chance of a 25-basis-point Fed rate increase in September.
Adding to the USD/CAD pair's potential weakness, the US Dollar (USD) is struggling amid broader market uncertainty ahead of crucial US inflation data. Goldman Sachs noted that a benign Consumer Price Index (CPI) reading could keep the Federal Reserve (Fed) from raising rates, even though August's solid labor market figures previously cleared a major hurdle for a potential hike.
Technical Analysis: Bearish bias prevails as USD/CAD holds below EMAs
In the daily chart, USD/CAD trades at 1.3830, keeping a modest bearish bias as spot holds under both the short-term and medium-term trend gauges. Price is capped by the nine- and 50-day Exponential Moving Averages (EMAs), suggesting rallies are being sold while the 14-day Relative Strength Index (RSI) around 43 hints at subdued, still-soft momentum rather than a decisive reversal.
On the topside, immediate resistance is seen at the nine-day EMA near 1.3845, with a stronger barrier at the 50-day EMA around 1.3931, where sellers may look to defend the broader downbeat structure. With no clear technical floors defined by moving averages in the current dataset, any further pullback from these overhead levels would leave USD/CAD vulnerable to probing lower chart lows.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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