Canadian Dollar holds gains as US Dollar struggles on easing safe-haven demand
- USD/CAD remains subdued on easing safe-haven demand for the US Dollar amid ongoing Middle East diplomatic efforts.
- The Canadian Dollar may face headwinds as lower oil prices weigh heavily on the commodity-linked currency.
- Robust US economic data and high Fed rate hike expectations may support the US Dollar.
USD/CAD gains ground after opening at a bearish gap, remaining in negative territory and trading around 1.3970 during Asian hours on Monday. The pair holds losses as the US Dollar (USD) struggles due to easing safe-haven demand, driven by ongoing diplomatic efforts to end the Middle East conflict despite lingering fears of renewed US military action against Iran. Qatari and Iranian officials continued discussions for a third consecutive day, working toward an agreement to end the war ahead of the US midterm elections.
However, downside pressure on the USD/CAD pair remains restrained as the commodity-linked Canadian Dollar could face headwinds from falling oil prices. Crude prices declined following an agreement by OPEC+ to maintain steady oil production targets for December, keeping required production at September levels. Under this arrangement, Saudi Arabia’s allocation is set at 10.478 million barrels per day (bpd), followed by Russia at 9.949 million bpd and Iraq at 4.431 million bpd.
Meanwhile, the US Dollar could regain ground on rising expectations for a Federal Reserve rate hike. According to the CME FedWatch Tool, traders are pricing in roughly a 75% chance of a December rate increase, boosted by recent US macroeconomic data pointing to economic resilience and persistent inflation.
Moreover, market participants are focused on key upcoming events, including the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services data. Remarks from several Federal Reserve officials scheduled throughout the week are also expected to offer further guidance on the central bank's monetary policy path.
Dollar narrative shifts as US PCE data show inflation progress has stalled
Strategists at Brown Brothers Harriman highlight that the latest US September PCE report “confirms that progress on inflation has stalled.” They note that, in line with consensus, “headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August,” while “core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August.” This combination of firmer headline and core readings underpins their view that the disinflation trend has lost momentum, reinforcing the backdrop of stalled inflation progress that is increasingly central to the current Dollar and rates narrative.
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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