USD/CAD extends losses below 1.3700 as Oil prices rise on supply concerns
- USD/CAD weakens as the commodity-linked Canadian Dollar gains support from higher Oil prices.
- Crude prices rise amid slowing Russian fuel Oil exports and supply disruptions in key US producing regions.
- The US Dollar recoups its daily losses due to rising risk aversion.
USD/CAD remains subdued for the sixth consecutive day, trading around 1.3690 during the European hours on Monday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support amid higher Oil prices, given Canada’s status as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price extends its gains for the second successive session, trading around $61.10 at the time of writing. Crude prices move higher, supported by slowing Russian fuel Oil exports and supply disruptions in key United States (US) producing regions.
Reuters, citing ship-tracking data from Kpler, reported on Friday that Russian fuel Oil exports to Asia have totaled around 1.2 million metric tons (about 246,000 bpd) so far in January, putting shipments on course for a third consecutive monthly decline. Meanwhile, Venezuelan shipments to China have reduced following the US capture of President Nicolas Maduro, which may tighten Asia’s supply of high-sulphur fuel Oil, used both as refinery feedstock and bunker fuel, lending support to prices.
The downside of the USD/CAD pair could be limited as the US Dollar (USD) recovers its daily losses, supported by the increased risk aversion, which could be attributed to trade and geopolitical tensions.
US President Donald Trump threatened to impose 100% tariffs on Canadian goods if Ottawa were to strike a trade deal with China. Canada’s Prime Minister Mark Carney said on Sunday that Ottawa has no plans to seek a free trade agreement with China. Trump also cautioned that a US aircraft carrier strike group is heading toward the Middle East as tensions with Iran intensify.
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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