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.

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