USD/CAD remains below 1.3850 as Oil prices remains stronger
- USD/CAD weakened as the commodity-linked Canadian Dollar strengthened on higher Oil prices.
- The WTI price may further rise as easing tensions reduces demand risks after Trump signaled a pause in tariffs on Europe over Greenland.
- The US Dollar receives support from easing geopolitical tensions between the US and Europe.
USD/CAD remains in the negative territory for the fourth consecutive session, trading around 1.3830 during the Asian hours on Thursday. The pair weakened as the commodity-linked Canadian Dollar (CAD) strengthened on higher Oil prices, reflecting Canada’s role as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price maintains its position after four days of gains, hovering around $60.50 per barrel at the time of writing. The upside of the Oil prices could be restrained as supply risks are offset by oversupply concerns, with the International Energy Agency (IEA) reiterating that global supply will significantly exceed demand this year despite a modest upgrade to demand growth. Industry data also showed the United States (US) crude inventories rose by about 3 million barrels last week.
Oil prices gained ground as easing geopolitical tensions helped lower downside risks to energy demand. US President Donald Trump ruled out the use of military force to acquire Greenland on Wednesday and said that he would step back from imposing tariffs on goods from European nations opposing his effort to take possession of Greenland.
Easing geopolitical tensions between the US and Europe supported the US Dollar (USD), helping limit losses in the USD/CAD pair. Traders await weekly Initial Jobless Claims, Gross Domestic Product Annualized, and Personal Consumption Expenditures (PCE) inflation data for fresh signals in the US economy.
Federal Reserve (Fed) officials have indicated limited urgency to ease policy without clearer evidence that inflation is moving sustainably toward the 2% target, even as markets still price in 50 basis points of rate cuts later this year.
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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