USD/CAD extends losses below 1.4000 amid higher Oil prices
- The USD retreats below 1.4000 against a stronger Canadian Dollar.
- WTI Crude prices appreciate beyond $58.00, buoying the commodity-sensitive Loonie.
- The unexpected rebound of Canada's CPI provided additional support to the CAD.
The US Dollar is losing ground for the second consecutive day against the Loonie, reaching lows right below 1.4000 on Wednesday’s early European session, after having peaked at 1.4080 last week. The pair is suffering amid a significant rebound in Oil prices and broad-based US Dollar weakness.
The commodity-sensitive Canadian Dollar is drawing support from higher Oil prices. The US benchmark WTI Oil gained about $2 in the last two days, buoyed by a report from the American Petroleum Institute revealing that US Oil stocks fell unexpectedly last week, marking their first decline in the last four weeks.
Beyond that, US President Donald Trump said on Tuesday that he reached a deal with Indian Prime Minister Narendra Modi to reduce tariffs on Indian products in exchange for reducing their Oil imports from Russia.
Canada's CPI puts BoC easing into question
In Canada, Consumer Price Index figures released on Wednesday revealed an unexpected pick-up in price pressures. The monthly CPI grew 0.1% in September following a 0.1% contraction in the previous month. Year-on-year, price pressures accelerated to 2.4% from 1.9% in the previous month.
These figures cast some doubt on investors’ expectations that the Bank of Canada will cut rates by 25 basis points after next week’s meeting, and provided an additional impulse for the Canadian Dollar’s recovery.
In the US, with the Sino-US trade war off the table, the focus has shifted back to the extended US government shutdown and expectations of upcoming rate cuts by the Federal Reserve, causing the US dollar to lose some of its shine from previous days.
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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