USD/CAD holds losses below 1.3900 as higher Oil lifts Canadian Dollar
- USD/CAD slips as commodity-linked CAD gains support from rising Oil prices amid escalating Iran tensions.
- President Trump warned that countries trading with Iran would face a 25% US tariff.
- Traders await December US CPI data on Tuesday for clues on the Federal Reserve’s policy path.
USD/CAD remains subdued for the second successive session, trading around 1.3870 during the Asian hours on Tuesday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support from higher Oil prices, given Canada’s status as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price gains ground for the fourth successive session, trading around $59.40 at the time of writing. Crude Oil prices gain traction amid supply concerns, which could be attributed to rising tensions in Iran. Traders brace for the release of the American Petroleum Institute (API) crude oil stockpiles report later in the day.
US President Donald Trump, on Monday, warned countries trading with Iran would face a 25% tariff on business with the United States, following threats of repercussions over civilian targeting, as Tehran cautioned the US and Israel against intervention, per Reuters.
The downside of the USD/CAD pair could be restrained as the US Dollar (USD) rebounds after registering modest losses in the previous session. Traders await the Consumer Price Index (CPI) data for December due on Tuesday, which could offer clues on the Federal Reserve’s (Fed) policy path.
Markets are pricing in two Federal Reserve rate cuts this year, starting in June, though an upside inflation surprise could curb easing prospects. December’s Nonfarm Payrolls (NFP) missed expectations, reinforcing a more dovish Fed outlook. The CME Group's FedWatch tool shows that Fed funds futures price in about 95% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
The US Dollar weakened after federal prosecutors threatened to indict Fed Chair Jerome Powell over his congressional testimony on a building renovation, raising concerns over the Fed’s independence. Investors are also awaiting a US Supreme Court ruling on the legality of President Donald Trump’s tariff policies, expected on 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.
