USD/CAD falls toward 1.3550 due to higher Oil prices, Canada’s 10-year yield
- USD/CAD depreciates as the Canadian Dollar gains ground amid higher crude Oil prices.
- WTI price climbs amid persistent fears of supply disruptions stemming from ongoing Israel-Iran tensions.
- The Canadian 10-year yield is trading around 3.4%, a five-month high, due to the odds of hawkish BoC policy outlook.
USD/CAD continues to lose ground for the fourth successive session, trading around 1.3560 during the European hours on Tuesday. The pair depreciates as the Canadian Dollar (CAD), a commodity-linked currency, draws support from the higher crude Oil prices, given Canada’s status as the largest crude supplier to the United States (US), the largest Oil consumer.
West Texas Intermediate (WTI) Oil price retraces its recent losses registered in the previous session, trading around $71.10 per barrel at the time of writing. Oil prices rise due to ongoing fears over supply disruption amid Israel-Iran hostilities. Traders are monitoring successive missile exchanges between the two security states and the looming threat of supply disruptions through the Strait of Hormuz.
Additionally, the yield on the Canadian 10-year government bond is trading around 3.4%, a five-month high. The rise in yields is supported by hawkish expectations for the Bank of Canada’s (BoC) policy outlook, as core inflation readings have stubbornly held above the BoC’s 2% target. Moreover, an unexpected 1.2% rise in Canadian April retail sales reinforced the hawkish view for future policy decisions by the central bank. The higher yields attract foreign capital seeking better returns, increasing demand for the Canadian Dollar.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is remaining stable at around 98.20 at the time of writing. The US Retail Sales data for May will be eyed on Tuesday. Traders will shift their focus toward the Federal Reserve's (Fed) interest rate decision, scheduled for Wednesday.
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.
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