Canadian Dollar gains support from higher oil prices amid Saudi pipeline disruptions
- Rising crude oil prices near four-month highs provide strong fundamental support to the commodity-linked Canadian Dollar.
- Saudi pipeline shutdowns and delayed regional shipping corridor talks keep global energy supply concerns elevated.
- The broader currency pair faces upside pressure as aggressive Federal Reserve rate-hike bets could boost the US Dollar.
USD/CAD halts its three-day winning streak, trading around 1.3870 during Asian hours on Monday. The pair inches lower as the commodity-linked Canadian Dollar (CAD) receives support from elevated oil prices.
Crude oil prices are rising toward nearly four-month highs following a drone attack that forced Saudi Arabia to shut down a major crude pipeline. This disruption has heavily impacted a critical route traditionally used to bypass the Strait of Hormuz. As a precautionary measure, Saudi operations on the East-West pipeline were suspended immediately following Thursday's attacks, and officials have not yet indicated when normal operations will resume.
Canada front-end stability offers near-term anchor for the Dollar
Analysts at Scotiabank note that front-end rate differentials are providing some support for the currency, observing that “front-end US/Canada spreads have held quite stable in the past few days, despite the elevated focus on US rate policy,” a backdrop they believe “should provide some anchoring for the CAD in the short run.”
However, the USD/CAD pair may rebound as the US Dollar (USD) gains support amid aggressive Federal Reserve (Fed) rate-hike bets for Wednesday’s decision following hotter US inflation reports. Financial markets have priced in nearly an 87% probability of a quarter-point rate hike at the Fed's September meeting, up from 59% a week ago, according to the CME FedWatch tool.
The US Consumer Price Index (CPI) accelerated in August, reinforcing expectations that the US central bank will raise interest rates next week. Data released by the Bureau of Labor Statistics on Friday showed that the US CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%. Both readings came in line with market expectations. Meanwhile, the core CPI, which excludes volatile food and energy prices, increased by 0.3% on a monthly basis, versus 0.2% prior, beating the forecast of 0.2%.
Technical Analysis:
In the daily chart, USD/CAD trades at 1.3870. The pair remains capped in the near term, with the 50-day Exponential Moving Average (EMA) acting as overhead resistance while price holds just above the short-term nine-day EMA at 1.3842. The 14-day Relative Strength Index (RSI) at 49 suggests neutral momentum after the recent recovery, hinting at consolidation below the medium-term trend line rather than a decisive bullish break.
On the topside, a daily close above the 50-day EMA at 1.3913 would be needed to ease the current bearish cap and open the way for a more sustained advance. On the downside, immediate support is seen at the nine-day EMA at 1.3842, and a drop back below this level would reinforce selling pressure and expose further weakness toward recent lows, keeping USD/CAD vulnerable while it trades beneath its primary trend gauge.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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