USD/CAD struggles near 1.3750 due to improved Oil prices
- USD/CAD faces challenges as the commodity-linked Canadian Dollar receives support from higher crude Oil prices.
- WTI Oil price may further lose ground as the OPEC+ agreed to increase production for September.
- The US Dollar may weaken as the latest US jobs report increases the likelihood of two Fed rate cuts.
USD/CAD remains subdued for the second successive session, trading around 1.3770 during the Asian hours on Monday. The pair faces challenges as the commodity-linked Canadian Dollar (CAD) receives support from the slight increase in crude Oil prices. It is important to note that Canada is the largest Oil exporter to the United States (US). Canadian markets will observe an August Civic Holiday.
West Texas Intermediate (WTI) Oil price rebounds after two days of losses, trading around $66.60 per barrel at the time of writing. However, Oil prices may further decline after the Organization of the Petroleum Exporting Countries and its allies, the group known as OPEC+, decided to increase production for September. The OPEC+ plans to raise output by 547,000 barrels per day next month, aiming to regain market share amid potential supply disruptions linked to Russia.
However, the Canadian Dollar could struggle as US President Donald Trump’s increased tariff to 35% from the previous 25% briefly unsettled markets. However, Canada’s USMCA exemptions limit the effective tariff on exports to around 5%, softening the overall impact on cross-border trade flows.
However, the USD/CAD pair also faced challenges as the US Dollar struggled over a worse-than-expected jobs report in the United States (US) released on Friday, which prompted market reaction to price in two interest rate cuts by the Federal Reserve (Fed). Traders are now pricing in 63 basis points (bps) of cuts by year-end, up from around 34 bps on Thursday, with the first cut seen in September.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
