USD/CAD holds steady above mid-1.3700s, over one-month high amid mixed cues

USD/CAD kicks off the new week on a positive note, though it lacks strong follow-through.
Escalating geopolitical tensions benefits the safe-haven USD and lends support to the major.
Bullish Crude Oil prices underpin the Loonie and caps spot prices ahead of the global PMIs.

Haresh Menghani FXStreet

The USD/CAD pair opens with a modest bullish gap at the start of a new week and touches a fresh monthly high, levels beyond mid-1.3700s during the Asian session. Spot prices, however, lack bullish conviction amid a combination of diverging forces, warranting caution before positioning for an extension of last week’s goodish recovery from the year-to-date low.

The global risk sentiment took a hit in reaction to the US attack on Iran’s nuclear facilities on Sunday, which raises the risk of a further escalation of conflict in the Middle East. This, in turn, drives some safe-haven flows towards the US Dollar (USD) and turns out to be a key factor acting as a tailwind for the USD/CAD pair. However, the growing acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle in September keeps a lid on any further gains for the USD.

Meanwhile, concerns that a broader Middle East conflict would disrupt supplies lift Crude Oil prices to over a five-month high and underpins the commodity-linked Loonie. Moreover, hopes that the US and Canada could have a trade deal soon, along with diminishing odds for more rate cuts by the Bank of Canada (BoC) amid a reacceleration in domestic inflation, supports the Canadian Dollar (CAD). This might further contribute to capping the upside for the USD/CAD pair.

Traders now look forward to the release of the global flash PMIs, which, along with geopolitical developments, will drive the risk sentiment and influence the Greenback. Apart from this, Oil price dynamics will be looked upon to grab short-term trading opportunities around the USD/CAD pair. The market focus will then shift to the latest Canadian consumer inflation figures and Fed Chair Jerome Powell's two-day congressional testimony starting on Tuesday.

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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