USD/CAD gains above 1.4000 due to increased risk aversion, weaker Oil prices
- USD/CAD receives support from risk-off sentiment ahead of US inflation data due on Friday.
- The White House confirmed that President Trump will meet Chinese leader Xi Jinping on October 30.
- The commodity-linked CAD struggles as Oil prices weakened after the US blacklisted Rosneft and Lukoil.
USD/CAD appreciates after registering little gains in the previous session, trading around 1.4020 during the Asian hours on Friday. The pair advances as the US Dollar (USD) gains ground, as traders adopt a cautious stance before September’s US inflation data, due later in the day, amid the ongoing government shutdown and resulting data blackout.
The Greenback also gained support after US President Donald Trump said on Wednesday that he expects to strike several agreements with Chinese President Xi Jinping during their meeting in South Korea next week. The White House confirmed that President Donald Trump will meet with Chinese leader Xi Jinping on October 30 in South Korea on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Summit, according to Reuters.
The US Dollar may struggle as the prolonged US government shutdown delays the key US economic data releases, including Nonfarm Payrolls (NFP), adding uncertainty for financial markets and the Federal Reserve (Fed). The US government shutdown has entered its 24th day, marking the second-longest federal funding lapse in history, with no end in sight. The GOP-backed stopgap bill failed to pass in the Senate for a 12th time on Wednesday evening.
The USD/CAD pair also appreciates as the commodity-linked Canadian Dollar (CAD) faces challenges on weaker Oil prices. West Texas Intermediate (WTI) Oil price depreciates after three days of gains, trading around $61.00 per barrel at the time of writing. However, the downside of crude Oil prices could be restrained due to increased supply concerns, driven by the fresh United States (US) sanctions on Russia's two biggest Oil companies, Rosneft and Lukoil.
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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