Canadian Dollar struggles as oil prices decline
- USD/CAD appreciates as the commodity-linked Canadian Dollar (CAD) struggles due to lower oil prices.
- Crude oil prices may regain due to recent strikes targeting tankers and warships in the Persian Gulf, intensifying regional risks.
- US PPI rose 5.4% YoY in August, accelerating from July and exceeding analyst expectations of 5.3%.
USD/CAD extended its gains for the third consecutive day, trading around 1.3840 during the Asian hours on Friday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles due to lower oil prices.
However, crude oil prices may rebound as the escalating conflict between the US and Iran has fueled concerns over prolonged disruptions to global energy supplies. Top US officials reportedly warned President Donald Trump that the war could continue through the remainder of his term, which ends in January 2029.
Meanwhile, Iranian leaders are reportedly determined to continue fighting despite mounting economic costs, viewing the conflict as an existential threat. They also claim that Tehran has managed to rebuild its missile capabilities and could intensify attacks on US and Gulf assets if Washington escalates its own strikes.
CAD underpriced as commodities firm and US data risk looms
Strategists at Scotiabank observe that rate and credit “spreads have held relatively steady” so far, but caution they “could turn a little more volatile in the next few days as markets react to US inflation data.” They also highlight that “strengthening crude (and firmer commodities in general) do provide some additional lift to Canadian terms of trade,” a support they suggest is “not perhaps fully reflected in the CAD currently.”
The US Bureau of Labor Statistics (BLS) reported on Thursday that the Producer Price Index (PPI) rose 5.4% year-over-year in August, up from 4.8% in July. This figure came in hotter than analyst expectations of 5.3%.
On a monthly basis, the headline PPI increased by 0.4% in August, matching the market consensus. Meanwhile, the core PPI rose by 0.2%, coming in slightly softer than the initial forecast.
Traders have largely chosen to remain on the sidelines, holding off on major positions ahead of the crucial US Consumer Price Index (CPI) inflation report scheduled for release later on Friday.
Strategists at Scotiabank observe that the Dollar is trading with a modestly positive tone ahead of key US releases, noting that “the USD is again mixed to slightly firmer against the G10 currencies as traders await this morning’s data.” The bank frames the latest moves as part of a cautious pre-data consolidation rather than a decisive shift in trend, with investors reluctant to take strong directional views before the next round of US inflation signals.
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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