Canadian Dollar strengthens to near 1.3700 on higher crude oil prices
- USD/CAD softens to near 1.3695 in Thursday’s Asian session.
- Cooler Canadian inflation boosts BoC rate cut bets.
- FOMC minutes revived speculation about potential interest rate hikes if inflation remains elevated.
The USD/CAD pair loses ground to around 1.3695 during the Asian trading hours on Thursday, pressured by higher crude oil prices. Nonetheless, softer Canadian inflation data has raised prospects the Bank of Canada (BoC) would resume its interest rate cutting campaign, which could weigh on the Canadian Dollar (CAD) against the Greenback.
Crude oil prices rebounds amid persistent tensions between the US and Iran. This, in turn, boost the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and higher crude oil prices generally have a positive impact on the CAD.
Canada’s Consumer Price Index (CPI) inflation eased to 2.3% YoY in January from 2.4% in December, according to Statistics Canada on Tuesday. This figure came in below the market consensus of 2.4%. This report reinforced the case that the BoC will cut the key interest rate again, which could drag the CAD lower and act as a tailwind for the pair.
On the other hand, hawkish FOMC minutes from its January policy meeting could provide some support to the US Dollar (USD) in the near term. Several policymakers said that the Federal Reserve (Fed) may need to raise rates if inflation remains stubbornly high.
On Friday, traders will take more cues from the preliminary reading of the US Gross Domestic Product (GDP) for the fourth quarter (Q4), along with the Personal Consumption Expenditures (PCE) Price Index and S&P Global Purchasing Managers Index (PMI) reports.
Canadian Dollar FAQs
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.
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.
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.
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.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
