USD/CAD rallies beyond 1.4050 on risk aversion, lower Oil prices
- The US Dollar has rallied 0.5% since Monday to reach fresh six-month highs past 1.4050.
- The safe-haven USD appreciates as a new rift between the US and China rekindles fears of a trade war.
- Lower Oil prices, due to concerns about demand, are putting additional pressure on the CAD.
The US Dollar has resumed its uptrend against a weaker Canadian Dollar this week. The pair has rallied beyond 0.5% from Monday’s lows to reach fresh six-month highs above 1.4050 at the time of writing.
A sourer market sentiment and growing concerns that the trade rift between the US and China may escalate into a full-blown trade war are supporting the US Dollar, which benefits from its safe-haven status, and weighing on the Loonie.
Canadian Dollar suffers amid fears of a trade war
Trade tensions between the US and China have heated up after the Asian country raised tariffs on US vessels entering its ports, a move that has been replicated by the US, which threatens to derail the fragile truce between the world’s two major economies.
These moves have cooled hopes of a de-escalation of the tensions, triggered by US Secretary Scot Bessent, who announced on Monday that the US President, Donald Trump, is planning to meet his Chinese counterpart, Xi Jinping, later this month.
Concerns about global trade have pushed Oul prices lower, adding pressure to the commodity-sensitive CAD. Oil is Canada’s main export, and the US benchmark WTI dropped to $58.50, weighed by concerns that further trade restrictions will reduce demand for energy in a time when producer countries are boosting their output.
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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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.
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