Canadian Dollar bulls seem hesitant as sliding Oil prices counter softer USD ahead of US CPI
- USD/CAD edges lower as easing inflationary concerns and a positive risk tone weigh on the USD.
- Retreating Crude Oil prices undermine the Loonie and help limit the downside for spot prices.
- Traders now look to the US CPI report for a fresh impetus amid the ongoing Middle East conflicts.
The USD/CAD pair continues with its struggle to register any meaningful recovery from a nearly one-month low, around the 1.3525 zone, set earlier this week, and remains on the back foot through the Asian session on Wednesday. Spot prices, however, lack bearish conviction and currently trade around the 1.3570 region, down less than 0.10% for the day, amid mixed cues.
The International Energy Agency (IEA) has proposed the largest release of Oil reserves in its history to bring down crude prices that have soared during the US-Israel war with Iran. This exerts some downward pressure on Crude Oil prices, which, in turn, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair. However, the emergence of some US Dollar (USD) selling keeps bullish traders on the defensive.
Meanwhile, Crude Oil prices retreated sharply following a massive rally early this week and eased inflationary concerns. This, along with a generally positive tone around the equity markets, is seen weighing on the safe-haven buck. However, concerns about the economic consequences of a further escalation of geopolitical tensions in the Middle East and the closure of the Strait of Hormuz might continue to benefit the USD's global reserve currency status.
Traders might also opt to wait for the release of the latest US consumer inflation figures amid worries that a continuous rise in energy prices would rekindle inflationary pressure. Hence, the crucial US Consumer Price Index (CPI) might influence market expectations about the Federal Reserve's (Fed) rate-cut path, which, in turn, will drive the USD demand. Apart from this, Oil price dynamics should provide some impetus to the USD/CAD pair.
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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