USD/CAD falls toward 1.4000 due to increasing BoC caution, higher Oil prices
- USD/CAD depreciates as the Canadian Dollar receives support amid increasing caution surrounding BoC policy outlook.
- The commodity-linked CAD strengthens as Oil prices advance amid optimism over a potential resolution to the US government shutdown.
- US Dollar stays subdued after the Senate passed the initial phase of a deal aimed at ending the government shutdown.
USD/CAD continues to lose ground for the consecutive session, trading around 1.4010 during the European hours on Monday. The pair depreciates as the Canadian Dollar (CAD) strengthens on upbeat domestic labor market data, bolstering expectations that the Bank of Canada (BoC) may pause its easing cycle.
Statistics Canada reported on Friday that the Unemployment Rate declined to 6.9% in October from the four-year high of 7.1% in September, against the market expectations of remaining at 7.1%. Meanwhile, Net Change in Employment rose by 66.6K jobs to 21,015,300, extending the jump from the previous month and contrasting sharply with bets that it would drop slightly.
The commodity-linked CAD also draws support amid improved Oil prices, given that Canada is the largest crude exporter to the United States (US). West Texas Intermediate (WTI) Oil price extends its gains for the second consecutive session, trading around $60.20 per barrel at the time of writing. Oil prices rise on optimism that the US government shutdown could end soon, boosting demand in the world’s top Oil consumer.
The USD/CAD pair also faces challenges as the US Dollar (USD) remains subdued after the Senate approved the first stage of a deal to end the government shutdown, reaching the required 60 votes as eight Democratic senators broke ranks with party leadership.
The amended proposal would still have to be passed by the House of Representatives and sent to President Donald Trump for his signature, a process that could take several days. The agreement would ensure federal employees receive back pay and allow states to resume delayed federal transfers. It would fund some departments through January 30, while others would receive full-year allocations.
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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