USD/CAD ticks up from 1.3690 with lower Oil prices hurting the loonie
- The Canadian Dollar trims gains, weighed by lower Oil prices.
- The truce between Israel and Iran is keeping Crude prices 16% below Monday's highs.
- Weak US data nd hopes of Fed easing are keeping USD's upside attempts limited.
The broad-based US Dollar’s reversal following the announcement of a ceasefire in the Middle East has been hollower against the Canadian Dollar, with downside attempts capped near 1.3700. The sharp decline in Oil prices is acting as a headwind for the commodity-sensitive Canadian Dollar.
A moderate optimism keeps risk appetite alive on Wednesday, in the absence of key macroeconomic data, but the bearish pressure on the US Dollar seems to have eased. The USD7CAD is showing marginal gains on Wednesday, trimming losses after a 0.2% decline over the previous two days.
The CAD struggles amid low Oil prices
The Canadian Dollar has been hit by a 16% decline in the price of Oil, Canada’s main import. The recent attacks on Iran seem to have spared the country’s main Oil plants, keeping its supply capacity intact
Apart from that, the ceasefire seems to have moved away the threat of a blockade in the strategic Strait of Hormuz, which was the main driver of Crude prices during the 12 days of hostilities. With a tense calm in the Middle East keeping Oil prices steady at $65, more or less where they were before the war, the Canadian Dollar is unlikely to rally.
In the US, the Fed Chair, Jerome Powell, maintained his cautious stance on his testimony to Congress, but he weak Consumer Confidence data seen and the growing divergence among the board members are keeping hopes of interest rate cuts alive. This is keeping the US Dollar’s upside attempts limited.
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.
