USD/CAD crawls up beyond 1.3770 amid a stronger US Dollar
- The Canadian Dollar remains on the defensive, with Oil prices near two-month lows.
- The Greenback is picking up on Monday, but hopes of Fed cuts are likely to keep upside attempts limited.
- US Consumer Price Index figures, due on Tuesday, will set the US Dollar's near-term direction.
The Canadian Dollar is on the defensive today, with Crude prices depressed near two-month lows, while the US Dollar picks up from lows, bringing the pair to intra-day highs near 1.3770 in an otherwise calm trading session.
The Loonie is losing ground on Monday as Oil prices languish at their lowest levels since early June. Hopes that some progress at the Ukraine peace talks will lead to easing restrictions on Russian energy exports are weighing heavily on the price of Crude, which is also Canada’s main export.
Hopes of Fed cuts limiting US Dollar's rallies
US Dollar upside attempts, on the other hand, are likely to remain limited, with investors ramping up bets for a Federal Reserve rate cut in September. Fed’s Bowman fed those hopes further on Friday, warning about the weakness of the labour market and pointing to three rate cuts before the end of the year.
Earlier on Friday, St Louis Fed President Musalem showed a similarly dovish rhetoric, playing down the inflationary risks of tariffs. Futures markets are pricing an 88% chance of a 25 basis point cut in September and at least another cut before the year-end.
US Consumer Price Index figures, due on Tuesday, will be analysed with attention to confirm these views. The market consensus anticipates a further acceleration in consumer prices that might cool Fed easing hopes and provide additional support to the US Dollar.
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.