USD/CAD stands firm near multi-year low, above mid-1.4200s amid political crisis in Canada

USD/CAD ticks higher for the fourth straight day amid a combination of supporting factors.
Political development in Canada, subdued Oil prices and dovish BoC undermine the Loonie.
Bets that the Fed will pause its rate-cutting cycle act as a tailwind for the USD and the major.

Haresh Menghani FXStreet

The USD/CAD pair trades with a positive bias for the fourth straight day on Tuesday and remains close to its highest level since April 2020 touched the previous day. Spot prices currently trade just above mid-1.4200s and the fundamental backdrop supports prospects for a further near-term appreciating move.

The Canadian Dollar (CAD) continues to be weighed down by the Bank of Canada's (BoC) aggressive policy easing and dovish outlook, projecting lower growth in the final quarter of this year. Meanwhile, an unexpected resignation from Canadian Finance Minister Chrystia Freeland adds a layer of political uncertainty. Adding to this, subdued Crude Oil prices undermine the commodity-linked Loonie and act as a tailwind for the USD/CAD pair.

The US Dollar (USD), on the other hand, remains on the defensive as traders seem reluctant and opt to wait for more cues about the Federal Reserve's (Fed) rate-cut path before placing fresh directional bets. Hence, the focus will remain glued to the outcome of a two-day FOMC meeting on Wednesday, which, along with the accompanying policy statement and Fed Chair Jerome Powell's comments at the post-meeting conference, will drive the USD demand.

Heading into the key central bank event risk, the growing market conviction that the Fed will adopt a more cautious stance on cutting interest rates remains supportive of elevated US Treasury bond yields. Furthermore, persistent geopolitical risks offer support to the safe-haven Greenback. This, in turn, validates the near-term positive outlook for the USD/CAD pair as trades now look to the US Retail Sales figures for some later during the North American session.

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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