USD/CAD holds gains above 1.3800 amid lower Oil prices
- USD/CAD gains ground as the commodity-linked Canadian Dollar struggles on lower crude Oil prices.
- WTI slides after Trump said Venezuela would deliver 30–50 million barrels of crude to the United States.
- The US Dollar steadies as traders adopt caution ahead of economic data that could shape expectations for Fed policy.
USD/CAD extends its gains for the fourth successive session, trading around 1.3810 during the Asian hours on Wednesday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles amid lower Oil prices. It is important to note that Canada is largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price loses ground for the second consecutive day, trading around $56.30 per barrel at the time of writing. Crude oil prices declined after US President Donald Trump said Venezuela would hand over 30–50 million barrels of crude to the United States. Markets worry that sustained Venezuelan flows could add supply to an already oversupplied market, while traders continue to assess the impact on future exports and the energy sector.
The upside of the USD/CAD pair could be restrained as the US Dollar (USD) edges lower after registering modest gains in the previous session. Traders await US economic data that could shape expectations for Federal Reserve (Fed) policy. ISM Services Purchasing Managers’ Index (PMI) and JOLTs job openings will be eyed later in the day.
Fed Governor Stephen Miran said on Tuesday that the US central bank should cut interest rates aggressively this year to sustain economic momentum. Meanwhile, Minneapolis Fed President Neel Kashkari, a voter on the Fed's rate-setting committee, cautioned that the unemployment rate could “pop” higher.
Richmond Fed President Tom Barkin, a non-voter on the Fed’s rate-setting committee this year, said Tuesday that interest rate adjustments will need to be “finely tuned” to incoming data, citing risks to both the Fed’s employment and inflation objectives, according to Reuters.
According to the CME Group's FedWatch tool, Fed funds futures continue to price in about an 82.8% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
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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