USD/CAD holds steady above mid-1.3900s amid mixed cues; remains confined in a familiar range

USD/CAD ticks higher on Monday as softer Oil prices undermine the commodity-linked Loonie.
A downgrade of the US credit rating and Fed rate cut bets weigh on the USD, capping the major.
Hopes for an eventual US-Canada trade deal further warrant some caution for bullish traders.

Haresh Menghani FXStreet

The USD/CAD pair struggles to gain any meaningful traction during the Asian session on Monday and remains confined in a familiar range held over the past week or so. Spot prices currently trade around the 1.3965-1.3970 region, nearly unchanged for the day amid mixed fundamental cues.

Crude Oil prices kick off the new week on a softer note and undermine the commodity-linked Loonie, which, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair. However, the emergence of some US Dollar (USD) selling holds back bullish traders from placing aggressive bets and caps the upside for the currency pair.

Investors seem convinced that the Federal Reserve (Fed) will cut rates further amid signs of easing inflation and the likelihood that the US economy will experience several quarters of sluggish growth. Apart from this, a surprise downgrade of the US government's credit rating keeps the USD depressed and keeps a lid on the USD/CAD pair.

Meanwhile, US Vice President JD Vance discussed fair trade policies with Canada's Prime Minister Mark Carney on Sunday. This raises hopes for an eventual trade deal between the US and Canada, which should offer some support to the Canadian Dollar (CAD) and warrants some caution before positioning any upside for the USD/CAD pair.

Moving ahead, there isn't any relevant market-moving economic data due for release on Monday, either from the US or Canada. That said, speeches by influential FOMC members will drive the USD and provide some impetus to the USD/CAD pair. Apart from this, Oil price dynamics might contribute to producing short-term trading opportunities.

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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