USD/CAD is attempting to return above 1.3800 with weak Oil prices hurting the Loonie
- The Canadian Dollar dips lower with Oil prices sliding on concerns about oversupply.
- Weak US data and dovish comments from Fed officials are limiting the US Dollar's recovery.
- Later today, US services activity data might give further support to the US Dollar.
The US Dollar is trimming losses on Tuesday, as the dust from the disappointing US Nonfarm Payrolls report settles. The Canadian Dollar is struggling amid lower Oil prices, which are ofsetting the impact of soft US macroeconomic figures and market expectations of upcoming Fed rate cuts.
The US Dollar appreciates moderately alongside higher US Treasury yields. The pair is testing levels above the 1.3800 mark, after bouncing at 1.3760 lows on Friday, still, well below last week’s highs, at 1.3880.
Soft US data and dovish Fed rhetoric are limiting the USD’s recovery
US data released on Monday showed a 4.8% contraction in Factory Orders in June, driven by a sharp decline in aircraft purchases. The final figures are slightly better than the 4.9% drop forecast by market analysts, yet a significant reversal from May’s 8.3% growth
Also on Monday, San Francisco Fed President Mary Daly warned that the central bank should not wait too long to lower interest rates in light of the softening labour market. These comments contributed to feed hopes of Fed cuts in September, and put additional weight on the US Dollar’s recovery.
Later today, the focus will be on the US Services activity data, which is expected to reveal some expansion in July, to offset the weak figures shown by the manufacturing sector.
The Canadian Dollar, on the other hand, is struggling amid lower Oil Prices. WTI Crude, Canada’s main export, has depreciated by about $5 in less than one week. The OPEC+ approved a further hike of 547,000 barrels per day over the weekend, heightening concerns of an oversupply, considering the soft global economic outlook.
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
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
