USD/CAD hovers around 1.3700 as Oil strength offsets firm US Dollar
- USD/CAD stays muted as stronger Oil supports the Canadian Dollar, offsetting the stronger US Dollar.
- WTI price may further appreciate as US President Trump warned Iran to strike a deal or face military consequences.
- US Initial Jobless Claims fell to 206K, down from 229K and below the 225K forecast.
USD/CAD steadies for the second successive session, hovering around 1.3700 during the Asian hours on Friday. The pair remains subdued as the commodity-linked Canadian Dollar (CAD) draws support from higher Oil prices, offsetting the stronger US Dollar (USD). Notably, Canada is the largest Oil exporter to the United States (US), supplying around 60% of total US crude imports.
West Texas Intermediate (WTI) Oil price is trading near $66.50 per barrel at the time of writing. The benchmark WTI remains near a six-month high of $66.82, reached earlier in the day, supported by escalating supply concerns linked to tensions between the United States (US) and Iran.
BBC reported that US President Donald Trump warned that Iran must reach an agreement or face “bad things,” keeping the threat of military action over fragile nuclear negotiations. Iran, in turn, informed UN Secretary-General Antonio Guterres that it does not seek conflict but will respond to any military aggression.
The Greenback continues to receive support following hawkish minutes from the Federal Open Market Committee (FOMC) released on Wednesday. The January FOMC Meeting Minutes revived speculation about possible rate hikes if inflation persists. While nearly all policymakers backed holding rates steady, only a few favored a cut, and officials signaled openness to easing if inflation cools as expected.
Additionally, stronger-than-expected US economic figures lent support to the US Dollar. The US Department of Labor (DOL) reported Thursday that Initial Jobless Claims came in at 206K for the week ending February 14, down from the prior week’s revised 229K and below the 225K market forecast.
Traders will likely observe the preliminary reading of the US Gross Domestic Product (GDP) for the fourth quarter (Q4) and the Personal Consumption Expenditures (PCE) data later on Friday.
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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