Canadian Dollar weakens amid falling oil prices as USD holds steady ahead of US PCE

USD/CAD attracts some dip-buyers as falling crude oil prices undermine the Loonie.
The US-Canada trade war also weighs on the CAD, though a softer USD caps the pair.
Traders look to the US PCE data for cues about the Fed’s rate path and some impetus.

Haresh Menghani FXStreet

The USD/CAD pair edges higher during the Asian session on Wednesday, though it remains confined within the previous day’s range. Spot prices currently trade around mid-1.3800s as traders now look to the US Personal Consumption Expenditures (PCE) Price Index for some meaningful impetus.

The crucial US inflation data will be looked upon for more cues about the Federal Reserve's (Fed) future policy path, which, in turn, should provide some meaningful impetus to the US Dollar (USD). In the meantime, diminishing odds for an immediate rate hike by the Fed, along with declining US bond yields and US-Iran diplomacy hopes, keep USD bulls on the defensive and act as a headwind for the USD/CAD pair.

Tamer July US inflation data cooled expectations for near-term Fed tightening and shifted market expectations toward a policy hold at the upcoming September 15–16 meeting. A CNBC report from Monday said that the US Treasury could use nearly $1 trillion to help fund the increased buybacks of longer-term bonds announced last week. This leads to a further decline in US bond yields and weighs on the USD.

Meanwhile, the US offered Iran sanctions relief and an end to the naval blockade in exchange for reopening the Strait of Hormuz and halting attacks carried out by its regional proxies. This, in turn, fuels optimism over a diplomatic resolution to end a six-month-old US-Iran war and drags crude oil prices to a two-week low. Apart from this, the deepening US-Canada trade war undermines the commodity-linked Loonie.

In the latest development, Canada announced new tariffs on US goods in retaliation to Washington's 50% tariffs on $20bn worth of Canadian goods. The mixed fundamental backdrop, however, warrants some caution before positioning for an extension of the USD/CAD pair's recent recovery move from the 1.3730 area, or a three-month low, touched last Friday.

USD/CAD 4-hour chart

Technical Analysis

The USD/CAD pair keeps a bearish near-term tone as it holds beneath the 100-period Simple Moving Average (SMA) on the 4-hour chart, at 1.3912. Traders may continue to treat the said barrier as a selling area until spot prices convincingly advance above this moving average to ease the current downside bias and open the door to a more constructive phase.

(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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