Canadian Dollar gains as US Dollar struggles despite rising Fed rate hike bets

USD/CAD struggles as the US Dollar declines despite growing expectations of a Fed rate hike in September.
Canadian Dollar strengthens as WTI hovers near three-month highs and further appreciates.
Middle East conflict escalation and potential Strait of Hormuz controls continue driving oil supply fears.

Akhtar Faruqui FXStreet

USD/CAD extends its losses for the second successive day, trading around 1.3800 during the Asian hours on Tuesday. Analysts at HSBC caution that, despite the recent improvement in sentiment around the Fed’s anti-inflation stance, broader structural issues have not disappeared. They highlight ongoing worries over US fiscal sustainability, noting that they “remain cautious about broader structural concerns, especially around US fiscal sustainability, which could still return and weigh on the Dollar yet again.”

The USD/CAD pair depreciates as the US Dollar (USD) declines, despite growing expectations of a Federal Reserve (Fed) rate hike in September. A stronger-than-expected August US jobs report raised Fed rate-hike odds to above 60%, with Nonfarm Payrolls (NFP) adding 162,000 jobs while the Unemployment Rate held steady. Investors are now turning their attention to the upcoming US Producer Price Index and Consumer Price Index inflation figures due later this week.

While the Greenback could draw support from safe-haven demand stemming from Middle East tensions, the USD/CAD pair continues to face downward pressure as the Canadian Dollar (CAD) strengthens on the back of rising crude oil prices.

West Texas Intermediate crude is hovering near three-month highs around $90.50 per barrel, driven by escalating conflict in the Middle East. Crude prices surged nearly 10% last week following increased military activity around the Strait of Hormuz and a recent attack on Saudi Aramco’s Jazan facilities. Prices could rise further as Iran threatens to target regional energy infrastructure in response to US actions, while Tehran's potential agreement with Oman to manage shipping through Hormuz raises additional supply control concerns.

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

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.

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