USD/CAD holds ground near 1.3650 as Oil prices decline
- USD/CAD holds steady as the commodity-linked Canadian Dollar struggles amid lower Oil prices.
- WTI may extend gains as geopolitical tensions rose after the US downed an Iranian drone near a carrier.
- Traders await ISM Services PMI, seen easing to 53.5 in January from 54.4.
USD/CAD moves little after registering modest losses in the previous session, trading around 1.3640 during the Asian hours on Wednesday. The pair inches higher as the commodity-linked Canadian Dollar (CAD) struggles amid lower Oil prices, reflecting Canada’s role as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price trades lower near $63.50 per barrel at the time of writing. However, Oil prices may build on previous gains as geopolitical tensions resurfaced after the US downed an Iranian drone near a US aircraft carrier in the Arabian Sea. However, President Trump said diplomatic channels remain open, with the White House confirming US-Iran talks are still scheduled for Friday.
Markets will focus later in the day on the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI), which is expected to ease to 53.5 in January from 54.4 in December.
The Bureau of Labor Statistics (BLS) will not publish the January employment report on Friday as scheduled because of the partial government shutdown that began last weekend. The shutdown ended late Tuesday after US President Donald Trump signed a funding deal negotiated with Senate Democrats, despite ongoing tensions over his immigration crackdown.
The US Dollar (USD) could gain support as expectations shift around Federal Reserve (Fed) leadership following Trump’s nomination of former Fed Governor Kevin Warsh as the next Fed Chair. Markets anticipate a slower pace of rate cuts and greater emphasis on balance sheet reduction under Warsh.
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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