Canadian Dollar declines on falling oil prices
- USD/CAD holds ground as a weakening crude oil market battles soft US jobs data.
- The commodity-linked Canadian Dollar faces downward pressure due to declining global oil prices.
- Weak June US Nonfarm Payrolls point to a cooling economy, significantly reducing market expectations for future Fed rate hikes.
USD/CAD inches higher after registering modest losses in the previous day, trading around 1.4190 during the Asian hours on Friday. The currency pair is holding its ground as a tug-of-war unfolds between a weakening crude oil market and soft economic data out of the United States (US).
The commodity-linked Canadian Dollar (CAD) is facing steady downward pressure as global oil prices decline. This slide in crude is primarily driven by easing geopolitical tensions in the Middle East, sparked by a series of diplomatic breakthroughs between the US and Iran.
Recent negotiations in Doha, mediated by Qatar and Pakistan, have successfully lowered the geopolitical risk premium that previously kept energy prices elevated. For Canada, these cheaper oil prices are reducing energy-driven inflation, which in turn reinforces market expectations that the Bank of Canada (BoC) could adopt a more dovish monetary policy stance moving forward.
Meanwhile, Canada’s domestic manufacturing sector showed a modest sign of resilience. The S&P Global Manufacturing Purchasing Managers Index edged up slightly to 53 in June, compared to 52.9 in May. While this points to a continuing but gentle expansion in manufacturing activity, it hasn't been enough to offset the broader drag from the slumping oil market. As a result, the Canadian Dollar remains vulnerable against its American counterpart.
On the other side of the equation, the US Dollar (USD) is managing to maintain its position despite a disappointing set of domestic labor data. The US economy added only 57,000 jobs in June, falling well short of the market consensus of 110,000. While this weaker Nonfarm Payrolls figure suggests a cooling economy and reduces the likelihood of future Federal Reserve (Fed) rate hikes, the downside for the Greenback was heavily cushioned by the unemployment rate, which unexpectedly fell to 4.2% from 4.3% in May. This downbeat employment report, paired with lower private payroll numbers earlier in the week, is ultimately keeping a tight lid on the USD/CAD pair's upside while simultaneously preventing the loonie dollar from staging a meaningful recovery.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
