USD/CAD climbs back closer to 1.4500 amid bearish Oil prices, renewed USD buying

USD/CAD regains positive traction and reverses a part of the previous day’s sharp slide.
Declining Oil prices undermine the Loonie and lend support amid a modest USD uptick.
The divergent Fed-BoC policy outlook supports prospects for a further appreciating move.

Haresh Menghani FXStreet

The USD/CAD pair attracts some dip-buying near the 1.4385 region during the Asian session on Tuesday and for now, seems to have stalled the previous day's sharp retracement slide from its highest level since April 2003. The move-up is sponsored by a combination of factors and lifts spot prices back closer to the 1.4500 psychological mark.

Crude Oil prices attract sellers for the second successive day on Tuesday and drop to over a one-month low, which undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair amid a pickup in US Dollar (USD) demand. US President Donald Trump's decision to delay the newly imposed tariffs on imports from Canada and Mexico eases worries over potential supply disruptions from two of the primary oil suppliers to the US. Furthermore, the prospects of lower fuel demand – led by the anticipated domino effect from Trump's policies on global economic growth – exert additional downward pressure on the black liquid.

Meanwhile, expectations that Trump's policies could push up inflation and give the Federal Reserve (Fed) less impetus to cut interest rates further trigger a modest bounce in the US Treasury bond yields. Adding to this, concerns about the potential economic fallout from Trump's protectionist policies assist the safe-haven USD to regain some positive traction following the previous day's dramatic turnaround from the vicinity of over a two-year high. This, in turn, offers additional support to the USD/CAD pair. Apart from this, the Bank of Canada's (BoC) dovish outlook suggests that the path of least resistance for spot prices is to the upside.

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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