- USD/CAD draws support from a modest downtick in Oil prices and a bullish USD.
- Reduced bets for a 50 bps Fed rate cut next month continue to benefit the buck.
- Middle East tensions act as a tailwind for the Loonie and cap gains for the major.
The USD/CAD pair oscillates in a narrow range, around the 1.3580 region on the first day of a new week and is currently placed just below a two-week high touched on Friday.
A modest downtick in Crude Oil prices undermines the commodity-linked Loonie amid expectations for a bigger interest rate cut by the Bank of Canada (BoC) later this month. The US Dollar (USD), on the other hand, consolidates last week's strong gains to its highest level since August 16 and remains supported by diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). This turns out to be a key factors acting as a tailwind for the USD/CAD pair.
The blowout US monthly jobs data released on Friday pointed to a still resilient labor market and suggested that the economy is in a much better shape. This, in turn, forced investors to further scale back their bets for another oversized interest rate cut by the US central bank in November and keep the yield on the benchmark 10-year US government bond close to the 4.0% threshold. Apart from this, persistent geopolitical risks offer additional support to the safe-haven buck.
Meanwhile, fears that escalating tensions in the Middle East could trigger a broader conflict and disrupt supply from the key oil-producing region help limit the downside for the black liquid. This, in turn, holds back bulls from placing fresh bets around the USD/CAD pair. Even from a technical perspective, a sustained strength beyond the very important 200-day Simple Moving Average (SMA) hurdle, near the 1.3600 mark, is needed to support prospects for further gains.
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 demand and provide some impetus to the USD/CAD pair later during the North American session. Apart from this, Oil price dynamics and geopolitical developments should assist traders in grabbing short-term trading opportunities around the currency pair.
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.
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