USD/CAD posts mild gains above 1.3800 as crude oil dips
- USD/CAD posts modest gains around 1.3810 in Wednesday’s early European session.
- Lower crude oil prices weigh on the commodity-linked Loonie.
- Traders await the US ISM Services PMI data on Wednesday ahead of the US jobs report.
The USD/CAD pair trades with mild gains near 1.3810 during the early European session on Wednesday. A fall in crude oil prices exerts some selling pressure on the commodity-linked Canadian Dollar (CAD) against the Greenback. Traders brace for the US economic data for clues about the timing of potential interest rate cuts by the Federal Reserve (Fed).
US President Donald Trump said on Tuesday that Venezuela will be turning over 30 million to 50 million barrels of sanctioned oil to the US. "The prospect of Venezuelan oil replacing some Canadian supply has prompted a reassessment of previously bullish 2026 CAD views," said Kevin Ford, FX & macro strategist at Convera. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD.
On the other hand, dovish comments from Fed policymakers could drag the US dollar (USD) lower. Fed Governor Stephen Miran said he expects incoming data to continue signaling that rate cuts are appropriate, warning that keeping policy too tight could “nip growth in the bud,” while adding that he remains optimistic about the broader economic outlook. Meanwhile, Minneapolis Fed President Neel Kashkari stated that he sees a risk that the jobless rate could "pop" higher.
The US ISM Services Purchasing Managers Index (PMI) report will be published later on Wednesday. The attention will shift to the US December employment data on Friday, as it might offer some hints about the US interest rate path. The market consensus forecast for Nonfarm Payrolls (NFP) is for a gain of 55,000 jobs.
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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