USD/CAD attracts some buyers to near 1.3650 as crude oil prices fall
- USD/CAD gains ground to around 1.3650 in Monday’s early European session.
- Lower crude oil prices weigh on the commodity-linked Loonie and act as a tailwind for the pair.
- Traders await the FOMC Minutes later on Wednesday for fresh impetus.
The USD/CAD pair extends the rally to near 1.3650 during the early European trading hours on Monday, bolstered by a decline in Oil prices. Meanwhile, traders will closely monitor any trade-related headlines in the countdown to US President Donald Trump's tariff deadline. On Wednesday, the Federal Open Market Committee (FOMC) Minutes will be in the spotlight.
The Trump administration is putting pressure on trade partners to reach new agreements by a Wednesday deadline. Letters will be sent on Monday, warning nations that higher tariffs may be imposed on August 1. The tariff uncertainty could weigh on the risk-sensitive assets like the Canadian Dollar (CAD) and create a tailwind for the pair.
The upbeat US June Nonfarm Payrolls (NFP) released on Thursday reduced the possibility of the US Federal Reserve’s (Fed) near-term monetary accommodation. This report has provided some support to the Greenback against the CAD. According to the CME FedWatch tool, the likelihood of a July reduction is declining from 25% to less than 5%.
Meanwhile, a fall in Crude Oil prices after the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to a bigger-than-expected production increase in August could weigh on the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
Traders will keep an eye on the release of the FOMC Minutes on Wednesday, as it might offer insight into how Fed officials view the US economy. Any dovish remarks from the Fed policymakers might cap the upside for the USD against the Loonie.
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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