Canadian Dollar gives away gains amid lower oil prices, fresh trade tensions
- USD/CAD returns to the top of the weekly range, above 1.3860 after bouncing from 1.3825 lows.
- Lower Oil prices and renewed US-Canada trade tensions are weighing on the Loonie.
- US Dollar rallies remain subdued ahead of the US PCE Prices Index release and the Jackson Hole Symposium.
The Canadian Dollar (CAD) reverses earlier gains against the US Dollar (USD) on Wednesday, weighed by a recent pullback in oil prices and the escalation of the trade war with the US. The USD/CAD is testing the top of the weekly trading range, at 1.3867, after bouncing from 1.3825 lows on Tuesday, with all eyes on the release of the US Personal Consumption Expenditures (PCE) Price Index due later on the day.
Trade tensions between the US and Canada are simmering again, after Canadian Finance Minister Francois-Philippe Champagne announced new tariffs of up to 50% on a wide range of US products in retaliation for US levies, following a failure in the negotiations to reach a trade deal last week. US President Donald Trump responded by threatening a new round of tariffs on Canadian cars, trucks, auto parts and steel.
Beyond that, Oil, Canada’s main export, keeps trading lower, which is adding pressure on the Loonie. The barrel of Brent Crude changes hands at $85.70 at the time of writing, nearly 8% below last Friday’s highs above $93.00. News reporting that Iran and Oman are holding talks to reopen the Strait of Hormuz is weighing on Crude prices, although the key waterway remains practically closed after six months of conflict.
US PCE inflation and Jackson Hole to set the US Dollar's direction
Investors, on the other hand, remain reluctant to place large directional bets on the US Dollar, ahead of the release of July's PCE Price Index data and the second quarter's Gross Domestic Product (GDP) figures. The market expects the Core PCE to have remained growing at a steady 3.3% yearly rate, while the economy is seen expanding at a 1.5% annualized rate, below the first quarter's 2.1%.
The highlight of the week, however, will be the Jackson Hole Symposium, where the Fed Chairman, Kevin Warsh, is expected to provide further insight on the bank's monetary policy plans. Analysts at Standard Chartered argue that Warsh must “restore confidence that the Fed will do what it takes to lower inflation,” and persuade investors that “a Fed that does less and relies more on the private sector is not a risk to macroeconomic stability.”
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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