USD/CAD holds gains near 1.3850 amid lower Oil prices
- USD/CAD appreciates as the commodity-linked CAD struggles on declining Oil prices.
- WTI prices edge lower as rising oversupply concerns ease ongoing risks linked to Russian Oil.
- Cleveland Fed President Beth Hammack cautioned that inflationary pressures are likely to remain in place for now.
USD/CAD extends its gains for the second successive session, trading around 1.3830 during the Asian hours on Tuesday. The pair draws support as the commodity-linked Canadian Dollar (CAD) weakens on declining Oil prices, given that Canada is the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil price extends its losses for the fifth consecutive session, trading around $61.90 per barrel at the time of writing. Crude Oil prices decline amid rising oversupply concerns, alleviating ongoing risks tied to Russian Oil.
Reuters reports suggest that Iraq may potentially add around 230,000 bpd to global supply by resuming crude exports through Kurdistan after a period of over two years. Additionally, Iraq has boosted oil exports under the OPEC+ framework, with September shipments projected between 3.4 and 3.45 million bpd.
The USD/CAD pair remains stronger as the US Dollar (USD) pares its recent losses from the previous session, following cautious statements from US Federal Reserve (Fed) officials on Monday. Traders will likely observe the preliminary reading of the US S&P Global PMI reports for September later in the day. US Federal Reserve (Fed) Chair Jerome Powell will also be eyed.
Traders will shift their focus toward the August Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve’s preferred inflation gauge, which is expected to signal subdued price pressures.
Fed Bank of Cleveland President Beth Hammack warned on Monday that inflation pressures will likely persist for the time being, noting challenges on both sides of the Fed's mandate to both control inflation and support the labor market. We should exercise great caution in easing policy restrictions, as we are falling short on inflation by a more significant margin, Hammack added.
Meanwhile, Richmond Fed President Thomas Barkin noted that tariff policies tend to result in higher prices for consumers, noting that the primary point of concern for businesses remains cloudy trade policy, not high interest rates.
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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