USD/CAD gains ground to near 1.3950 as US Dollar rebounds
- USD/CAD holds gains around 1.3950 in Tuesday’s early Asian session.
- US government shutdown continues after funding proposals fail in the Senate.
- Higher crude oil prices could support the commodity-linked Loonie.
The USD/CAD pair gains traction near 1.3950 during the Asian trading hours on Tuesday, bolstered by a rebound in the US Dollar (USD). However, the upside for the pair might be limited amid fears of a prolonged US government shutdown and higher crude oil prices. The Canadian International Merchandise Trade and Ivey Purchasing Managers Index (PMI) reports will be in the spotlight later on Tuesday.
Traders await signs that the US federal government will reopen, with Congress so far unable to pass a bill to continue funding operations. The US government shutdown entered its seventh day, with the US President Donald Trump administration warning it was moving forward with plans to slash the federal workforce. Concerns that the shutdown will impact the US economy could drag the Greenback lower against the CAD.
Meanwhile, a rise in crude oil prices could boost the commodity-linked Loonie and create a headwind for the pair. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed to a smaller-than-expected hike in its crude production levels. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
Traders will take more cues from the speeches from the US Federal Reserve (Fed) officials later on Tuesday. Fed’s Raphael Bostic, Michelle Bowman, Stephen Miran and Neel Kashkari are set to speak. Any hawkish remarks from Fed policymakers could help limit the USD’s losses in the near term.
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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