Canadian Dollar pulls back from two-month top as rebounding USD counters higher oil prices

USD/CAD kicks off the new week on a slightly positive note, though it lacks follow-through.
Geopolitical uncertainties and bets for at least one Fed rate hike this year support the USD.
Friday’s upbeat Canadian jobs data and oil prices underpin the Loonie, capping spot prices.

Haresh Menghani FXStreet

The USD/CAD pair attracts some dip-buyers at the start of a new week and recovers a part of Friday's heavy losses to the 1.3925 area, or a nearly two-month low. Spot prices climb back above mid-1.3900s during the Asian session, though the upside potential seems limited amid a combination of diverging forces.

As investors look past Friday's disappointing US Nonfarm Payrolls (NFP) report, the US-Iran standoff keeps the geopolitical risk premium in play and acts as a tailwind for the safe-haven US Dollar (USD). Furthermore, bets that the US Federal Reserve (Fed) will raise borrowing costs by the end of this year amid inflation risks stemming from recovering crude oil prices lend support to the Greenback and the USD/CAD pair.

Meanwhile, uncertainties surrounding the reopening of the Strait of Hormuz remain supportive of a bid tone surrounding crude oil prices, which is seen underpinning the commodity-linked Loonie. The Canadian Dollar (USD) could further benefit from the upbeat domestic jobs report, released on Friday. This, in turn, might hold back traders from placing aggressive bullish bets on the USD/CAD pair and cap any meaningful gains.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent pullback from the vicinity of mid-1.4200s, or the year-to-date high touched in June, has run its course and positioning for further upside. Traders might also opt to wait for this week's release of US inflation figures. Moreover, further developments surrounding the Middle East crisis will be looked upon for some impetus.

USD/CAD daily chart

Technical Analysis:

The USD/CAD pair’s ability to stay above the 100-day Simple Moving Average (SMA) at 1.3917 suggests underlying demand is still cushioning pullbacks, even as upside momentum appears measured. A break would expose a deeper correction. On the flip side, traders may look to psychological round figures and recent swing highs to define the next topside hurdles as long as spot prices hold above the 100-day SMA.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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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