USD/CAD remains below 1.3950 after pulling back from four-month highs
- USD/CAD retreated after reaching a four-month high of 1.3958 on Friday.
- The US Dollar struggles as the August inflation report increased the likelihood of the Fed delivering a rate cut in October.
- The commodity-linked CAD may come under pressure as subdued crude prices follow the resumption of Kurdistan exports.
USD/CAD halts its five-day winning streak, trading around 1.3920 during the Asian hours on Monday. The pair retreated after reaching a four-month high of 1.3958 on Friday as the US Dollar (USD) lost ground after the US August inflation report boosted the likelihood that the US Federal Reserve (Fed) will likely deliver another interest rate cut in October.
The US Personal Consumption Expenditures (PCE) Price Index rose 2.7% year-over-year in August, as expected. The precious reading was a 2.6% increase. Meanwhile, the core PCE, which excludes food and energy prices, came in at 2.9% YoY during the same period, also matching expectations.
The Greenback also faces challenges due to market caution amid shutdown risks of the United States (US) government. US President Donald Trump will meet congressional leaders on Monday to discuss government funding. Without a deal, a shutdown could begin on October 1, coinciding with new tariffs on trucks, pharmaceuticals, and more. The standoff could also delay the September payrolls report and other key data, per Reuters.
The downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may face challenges amid subdued Crude Oil prices. West Texas Intermediate (WTI) Oil price hovers around $65.00 per barrel at the time of writing.
Oil prices slipped after Iraq’s Kurdistan region resumed exports following a 2.5-year halt, adding supply to a market facing surplus risks. Under a new deal with Baghdad, the Kurdistan Regional Government, and international Oil firms, 180,000–190,000 barrels per day (bpd) will initially flow to Turkey’s Ceyhan port.
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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