USD/CAD weakens further below 1.3900 amid bearish USD, rising Oil prices

USD/CAD drifts lower for the third straight day amid a combination of negative factors.
Rising Crude Oil prices and reduced bets for a June BoC rate cut underpin the Loonie.
Fed rate cut bets and US fiscal concerns weigh on the USD, and contribute to the slide.

Haresh Menghani FXStreet

The USD/CAD pair extends the previous day's breakdown momentum below a one-week-old trading range and attracts sellers for the third successive day on Wednesday. This also marks the fourth day of a negative move in the previous four and drags spot prices below the 1.3900 mark, or a nearly two-week low during the Asian session.

Crude Oil prices shot to a nearly one-month high amid reports that Israel is preparing a strike on Iranian nuclear facilities, which raises concerns about supply disruption from the Middle East region. Moreover, signs of faltering US-Iran nuclear talks lend support to the black liquid, which, in turn, is seen underpinning the commodity-linked Loonie. Moreover, hotter-than-expected Canadian core inflation figures released on Tuesday dampened hopes for a Bank of Canada (BoC) rate cut in June and provided an additional boost to the Canadian Dollar (CAD).

This, along with the prevalent US Dollar (USD) selling bias, exerts additional downward pressure on the USD/CAD pair. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, drops to a two-week low amid concerns about the US fiscal health and bets that the Federal Reserve (Fed) will lower borrowing costs further in 2025. Moreover, Fed officials on Tuesday raised concerns over the US economic outlook amid the uncertainty over the Trump administration's policies. Apart from this, renewed US-China trade tensions weigh on the buck.

The USD/CAD pair's downfall could further be attributed to some technical selling following a breakdown below the lower boundary of a short-term trading range. This, along with the aforementioned fundamental backdrop, suggests that the path of least resistance for the USD/CAD pair remains to the downside and supports prospects for deeper losses. In the absence of any relevant economic data on Wednesday, speeches from influential FOMC members will drive the USD demand. Apart from this, Oil price dynamics should provide some impetus to spot prices.

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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