Canadian Dollar weakens despite higher oil prices
- USD/CAD may decline as the commodity-linked Canadian Dollar may receive support from higher oil prices.
- OPEC+ approved an 188,000-barrel-per-day output hike led by Saudi Arabia and Russia, signaling confidence in regional stability.
- The US Dollar strengthens as markets expect multiple Fed rate hikes this year.
USD/CAD gains ground for the second consecutive day, trading around 1.4210 during the Asian hours on Monday. The upside of the pair could be restrained as the commodity-linked Canadian Dollar (CAD) could receive support from higher oil prices.
Oil traders are moving cautiously while traffic through the Strait of Hormuz appears to be stabilizing; expected production hikes from OPEC+ (The Organization of Petroleum Exporting Countries and its allies (OPEC+), including Russia) have renewed fears of a global supply glut.
Several tankers made unexplained detours on Saturday, and shipping lanes through the critical chokepoint normalized by Sunday. Meanwhile, OPEC+ approved a modest output hike of 188,000 barrels per day for next month, led by Saudi Arabia and Russia, a move signaling confidence in regional stability.
The USD/CAD pair appreciates as the US Dollar (USD) rises, as traders expect multiple Federal Reserve (Fed) rate hikes later this year. This comes despite easing global inflation concerns, which have been helped by oil flows normalizing through the critical Strait of Hormuz.
The CME FedWatch tool shows financial markets are pricing in a 77.3% chance of interest rate hikes by year-end. Investors are now looking ahead to Wednesday's release of the Fed’s June policy Meeting Minutes to gain clearer insights into the future path of interest rates.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
