Canadian Dollar remains subdued near two-month lows as falling oil prices weigh
- Canadian Dollar struggles as recovering Middle East oil exports and planned US reserve releases dragged down oil prices.
- Rising US crude inventories further added downward pressure to energy markets.
- Strong Federal Reserve rate-hike expectations provided additional support to the buoyant US Dollar.
USD/CAD continues its winning streak for the eighth consecutive day, trading around 1.4200 during Asian hours on Wednesday. The currency pair remains positioned near two-month highs as the commodity-linked Canadian Dollar (CAD) faces headwinds from falling crude oil prices.
Energy markets eased as Middle Eastern crude exports recovered toward pre-war levels, reaching 17.5 million barrels per day, about 98% of baseline output. Supply streams received a boost as Saudi Arabia partially restarted its East-West pipeline at roughly half capacity, while covert tanker traffic through the Strait of Hormuz remained active.
Downwards pressure on oil prices intensified following supply relief measures and inventory gains in the United States (US). The US government announced plans to release up to 40 million barrels from the Strategic Petroleum Reserve (SPR) to curb domestic fuel costs. Reinforcing the bearish tone for crude, fresh industry data revealed a 1-million-barrel build in US crude inventories over the past week.
Canada growth cools as third-quarter rebound loses steam
Economists at NBC argue that “this morning’s GDP report confirms that the Canadian economy’s rebound lost some momentum in the third quarter,” underscoring a softer tone after several months of solid gains. Even so, they highlight that Statistics Canada’s preliminary estimate still “points to a 0.2% increase in GDP in August,” suggesting that activity continues to expand, albeit at a more moderate pace.
Meanwhile, the US Dollar gained ground as market expectations of further Federal Reserve rate hikes strengthened. According to the CME FedWatch Tool, traders are now pricing in nearly a 68% chance of a rate hike in October and a 95% likelihood of a quarter-point increase in December. Market focus now shifts to Friday's US Nonfarm Payrolls report, where economists project 90,000 jobs added in September, with the Unemployment Rate steady at 4.1%.
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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