USD/CAD stays below 1.4050 as Oil gains, US data concerns persist
- USD/CAD holds losses as the commodity-linked CAD gains on improved crude Oil prices.
- WTI price climbed after a Ukrainian drone strike damaged an oil depot at Russia’s Black Sea port of Novorossiysk.
- Kevin Hassett warned some October data may “never materialize” as agencies were unable to collect information during the shutdown.
USD/CAD inches lower after registering gains in the previous session, trading around 1.4020 during the Asian hours on Friday. The pair remains subdued as the commodity-linked Canadian Dollar (CAD) receives support from higher Oil prices. It is worth noting that Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price gains for the second successive session, trading around $59.50, up by more than 1.5%, at the time of writing. Crude prices rose after a Ukrainian drone strike damaged an Oil depot at Russia’s Black Sea port of Novorossiysk. The Krasnodar region’s operational headquarters said on Telegram that drone debris hit three apartments, an Oil facility at a trans-shipment complex, and several coastal structures, per Reuters.
The USD/CAD pair also draws downward pressure as the US Dollar (USD) struggles, with economic caution in the United States (US) overshadowing improved sentiment after the shutdown’s end. National Economic Council Director Kevin Hassett cautioned that some October data may “never materialize,” as several agencies were unable to gather information during the shutdown. US President Donald Trump signed the government funding bill on Thursday to end the record 43-day government shutdown in US history.
However, the Greenback may regain ground amid cautious Fedspeak, which has decreased the odds of a Federal Reserve (Fed) rate cut in December. The CME FedWatch Tool shows markets pricing in nearly a 50% chance of a 25-basis-point Fed rate cut in December, down from 69% a week ago.
Federal Reserve Bank of St. Louis President Alberto Musalem highlighted the need for caution on Thursday, noting there is limited room to ease without risking overly accommodative policy. Meanwhile, Minneapolis Fed President Neel Kashkari added that inflation remains too high at 3%. Initial private-sector reports for October suggest a cooling labor market and wavering consumer confidence, with persistent concerns about inflation.
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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