Canadian Dollar slides to fresh low since late March vs USD despite rallying Oil prices

USD/CAD attracts some follow-through buying, though bulls seem hesitant amid rallying Oil prices.
Friday’s upbeat Canadian jobs report also underpins the Loonie and contributes to capping the pair.
Geopolitical uncertainties and Fed rate hike bets favor USD bulls, backing the case for further gains.

Haresh Menghani FXStreet

The USD/CAD pair touched a fresh high since late March during the Asian session on Monday and looks to build on the strength further beyond mid-1.3900s. However, a goodish pickup in Crude Oil prices, along with Friday's upbeat Canadian jobs report, underpins the commodity-linked Loonie and might cap any further gains amid a subdued US Dollar (USD) price action.

WTI Crude Oil prices climb around 4.50% as Iran's missile attack on Israel’s Ramat David air base on Sunday night threatened a fragile ceasefire and tempered hopes for a deal to end a three-month-old conflict. Moreover, Statistics Canada reported on Friday that the economy added 87,800 jobs in May and the unemployment rate fell to 6.6%, which further offers support to the Canadian Dollar (CAD) and warrants caution for the USD/CAD bulls.

Meanwhile, the USD pause for a breather following Friday's upbeat US Nonfarm Payrolls (NFP) report-inspired blowout rally to a two-month high and contributed to capping the currency pair. In fact, the economy added 172K jobs in May, compared to 85K estimated and the previous month's upwardly revised reading of 179K. Moreover, the Unemployment Rate held steady at 4.3%, offsetting the expected slowdown in Average Hourly Earnings.

Traders were quick to react and are now pricing in over a 70% chance that the US Federal Reserve (Fed) will hike interest rates by the end of this year. Apart from this, persistent geopolitical uncertainties should act as a tailwind for the safe-haven USD. In the latest developments, the Israeli air force hit military targets in western and central Iran in retaliation for the latter's ballistic missile attack on Israel’s Ramat David air base on Sunday night.

This, in turn, suggests that the path of least resistance for the USD is to the upside and backs the case for an extension of the USD/CAD pair's recent well-established uptrend witnessed over the past month or so. Moving ahead, there isn't any relevant market-moving economic data due for release on Monday, either from the US or Canada, leaving the USD/CAD pair at the mercy of Oil price dynamics and incoming geopolitical headlines.

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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