Canadian Dollar struggles near two-week low vs USD amid bearish oil prices, ahead of FOMC
- USD/CAD bulls turn cautious as the market focus remains glued to the crucial FOMC meeting.
- A pause in US-Iran hostilities caps the USD upside and acts as a headwind for the currency pair.
- A slump in oil prices and the BoC’s dovish bias undermine the Loonie, supporting spot prices.
The USD/CAD pair enters a bullish consolidation phase near a two-week high, touched during the Asian session on Tuesday, and currently trades around 1.4120. The fundamental backdrop supports prospects for further upside, though bulls seem hesitant and await the outcome of a two-day FOMC policy meeting.
The US Federal Reserve (Fed) is scheduled to announce its decision on Wednesday and is universally expected to leave interest rates unchanged. Meanwhile, the focus will be on the accompanying policy statement and the post-meeting press conference, where comments from Fed Chair Kevin Warsh will be scrutinized for cues about the future policy path. This, in turn, will drive the US Dollar (USD) in the near term and provide some meaningful impetus to the USD/CAD pair.
DBS Group Research observes that “markets have been in a flux as investors struggle with news flow over the US-Iran conflict,” with shifting geopolitical headlines keeping sentiment unsettled. From a rates perspective, DBS adds that “with the FOMC meeting looming, we don’t think investors are comfortable bringing rates lower just yet, even as oil prices correct lower,” suggesting a reluctance to meaningfully reprice USD rates before clearer policy signals emerge.
Heading into the key central bank event risk, the USD Index (DXY), which tracks the Greenback against a basket of currencies, holds steady near monthly high, though a pause in US-Iran hostilities caps gains. Meanwhile, the recent slump in crude oil prices to a one-week low, along with the Bank of Canada's (BoC) dovish bias and trade war fears, undermines the commodity-linked Loonie. This backs the case for an extension of the USD/CAD pair's recovery from a one-month low.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
