USD/CAD trades above 1.3650 as easing US-China tensions offset impact of higher Oil prices
- USD/CAD appreciates as the US Dollar remains stronger ahead of CPI inflation data due on Wednesday.
- The CAD may receive support from improved Oil prices amid easing US-China tariff tensions.
- US CPI is expected to rise by 2.5% year-over-year in May, slightly above the previous 2.3% increase.
USD/CAD retraces its recent losses, trading around 1.3680 during the Asian hours on Wednesday. However, the upside of the USD/CAD pair could be limited as the commodity-linked Canadian Dollar (CAD) possibly receives support from the improved crude Oil prices. Higher Oil prices may provide support for the CAD as Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price remains above $64.00 per barrel at the time of writing. Crude Oil prices receive support from positive risk sentiment, driven by a cooling down of tariff tensions between the US and China.
Moreover, traders welcomed the positive developments from the US-China discussion held in London. Reports suggest that Washington is considering easing semiconductor restrictions and looking for accelerated rare-earth shipments. This boosted hope of reduced supply-chain friction, supporting global trade sentiment and improving potential demand for Canada’s commodity-heavy export base, offering support to the CAD.
However, the US Dollar (USD) also receives support from easing US-China tariff tensions, which offsets the impact of the higher crude prices, strengthening the USD/CAD pair. US Commerce Secretary Howard Lutnick suggested on Tuesday that potential resolutions with China have been achieved and both countries have reached a framework to implement the Geneva Consensus.
Meanwhile, China’s Vice Commerce Minister Li Chenggang said that communication with the United States has been rational and candid, and he will report on a framework to Chinese leaders. However, officials from both sides will seek approval from their leaders before implementation, according to Bloomberg.
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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