Canadian Dollar remains on the front foot vs USD as oil rebounds and Fed hike bets fade

USD/CAD sticks to a negative bias on Thursday amid a combination of negative factors.
Rebounding oil prices underpin the Loonie and weigh on the pair amid a soft USD.
US-Iran peace deal hopes and receding Fed rate-hike bets keep USD on the defensive.

Haresh Menghani FXStreet

The USD/CAD pair remains on the back foot during the Asian session on Thursday, with bears now awaiting a break below the 1.4000 psychological mark before positioning for an extension of the previous day's pullback from a one-week top.

Crude oil prices recover slightly from an over three-week low, touched on Wednesday, as missile attacks on Saudi oil tankers in the Red Sea by Iran-backed Houthis in Yemen fuel concerns about supply disruptions through the key route. This, in turn, is seen underpinning the commodity-linked Loonie. Investors, however, remain hopeful about a potential US-Iran peace deal, which keeps the US Dollar (USD) on the defensive and turns out to be another factor acting as a headwind for the USD/CAD pair.

Iran’s Foreign Ministry spokesperson, Esmaeil Baghaei, said that Iran and Oman are close to finalizing a proposed framework for commercial shipping through the Strait of Hormuz. This adds to the optimism over expectations of a diplomatic resolution to end a five-month-old US-Iran war, which, along with receding US Federal Reserve (Fed) rate hike bets, fails to assist the USD in attracting any meaningful buyers. Traders, however, seem hesitant to place aggressive bets ahead of the crucial monthly jobs reports.

The popularly known US Nonfarm Payrolls (NFP) report will be published on Friday, along with the Canadian employment details, which should provide some meaningful impetus to the USD/CAD pair. Traders will further take cues from fresh developments surrounding the Middle East crisis. In the meantime, the mixed fundamental backdrop makes it prudent to wait for some follow-through selling before positioning for the resumption of the USD/CAD pair's downfall from the June swing high.

USD/CAD daily chart

Technical Analysis:

In the daily chart, USD/CAD keeps a bearish near-term tone and remains capped beneath the 50-day simple moving average (SMA) at 1.4070. The inability to reclaim this overhead SMA suggests rallies are being sold, with the pair consolidating near the lower end of its recent range. However, a daily close above this level would hint at a deeper corrective bounce, while sustained trading below it leaves the risk tilted toward further slippage.

(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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