Canadian Dollar drifts lower as falling oil prices counter weak USD amid Iran hopes

USD/CAD attracts some buyers, albeit it lacks follow-through amid a combination of diverging forces.
A slump in oil prices undermines the Loonie and supports spot prices, though a weaker USD caps gains.
The focus shifts to this week’s key macro releases, including key jobs reports from the US and Canada.

Haresh Menghani FXStreet

The USD/CAD pair kicks off the new week on a positive note, though it lacks bullish conviction and remains confined within Friday's broader range. Spot prices currently trade around the 1.4030 region, up less than 0.10% for the day amid mixed fundamental cues.

Crude oil prices tumble after US President Donald Trump cancelled a threatened attack on Iran, claiming Mideast allies have reached the parameters of a deal to end the five-month-old war. Adding to this, the OPEC+ members agreed to increase oil production by 188,000 barrels per day in September, exerting additional pressure on the black liquid. This, in turn, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair, though the prevalent US Dollar (USD) selling bias caps further gains.

1An intraday slump in crude oil prices eases inflation fears and tempers bets for an immediate interest rate hike by the US Federal Reserve (Fed). Furthermore, aggressive follow-through short-covering around the Japanese Yen (JPY) drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to its lowest level since June 17. This, in turn, warrants some caution for USD/CAD bulls and positioning for any meaningful recovery from sub-1.4000 levels, or a one-and-a-half-month low touched last Thursday.

Market participants now look forward to this week's important US macroeconomic releases, scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later today. The focus, however, will be on the crucial monthly employment reports from the US and Canada, due on Friday, which will play a key role in influencing the USD/CAD pair in the near term. Apart from this, further developments surrounding the Middle East crisis might continue to infuse volatility and provide some meaningful impetus.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

AUD/USD sticks to positive bias above 0.7100; lacks bullish conviction

AUD/USD trades with a positive bias for the second straight day, holding above 0.7100 during the Asian session on Friday as softer US bond yields keep US Dollar bulls on the back foot. Furthermore, bets that the RBA will hike interest rates later this month support the Aussie. However, the Fed's hawkish outlook, along with geopolitical uncertainties, limits USD losses and caps the currency pair.

USD/JPY trades near two-week top, above 156.00 after Japan's CPI and ahead of BoJ

USD/JPY catches some bids during the Asian session after data released Friday showed Japan's core consumer inflation held near the BoJ’s 2% target in August. Spot prices trade above 156.00 as traders await the BoJ's expected interest rates hike to a 31-year high. Meanwhile, softer US bond yields undermine the US Dollar, capping the currency pair.

Gold holds above $4,350 as softer US bond yields cap USD

Gold trades with a positive bias for the second straight day and holds above $4,350 during the Asian session on Friday, though the upside seems capped. US bond yields move away from multi-year highs amid a pullback in oil prices, capping the US Dollar and supporting the non-yielding bullion. However, the Fed's hawkish stance and geopolitical risks limit USD losses, keeping XAU/USD below the weekly top, set on Thursday.

Bank of Japan is set to raise interest rates as inflation, economic growth support tighter policy

The Bank of Japan’s monetary policy meeting will close a week packed with central bank decisions on Friday, with markets particularly interested in confirming expectations of a hawkish shift that has boosted a strong Japanese Yen recovery in September.

S&P Global to acquire OpenZeppelin in on-chain security expansion

S&P Global has agreed to acquire blockchain security firm OpenZeppelin as the financial data and analytics company expands its on-chain risk assessment capabilities. The acquisition, announced Thursday, will bring OpenZeppelin’s smart contract security services, development tools and open-source libraries into S&P Global’s existing digital asset and risk assessment business.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.