USD/CAD refreshes daily high on sliding Oil prices; remains below 1.4000 amid weaker USD
- USD/CAD reverses an early dip to a two-week low and draws support from a combination of factors.
- Retreating Oil prices undermines the Loonie and acts as a tailwind for the pair amid a bullish USD.
- Falling US bond yields might cap gains for the USD and any further appreciating move for the pair.
The USD/CAD pair attracts some dip-buying near the 1.3925 area, or a two-week low touched earlier this Monday and climbs to a fresh daily peak during the first half of the European session. The intraday uptick is sponsored by a combination of factors and lifts spot prices to the 1.3975 region in the last hour.
Crude Oil prices kick off the new week on a weaker note and for now, seem to have snapped a two-day winning streak to a two-week high touched on Friday. This, in turn, is seen undermining the commodity-linked Loonie, which, along with the underlying bullish sentiment surrounding the US Dollar (USD), acts as a tailwind for the USD/CAD pair.
The USD Index (DXY), which tracks the Greenback against a basket of currencies, lacks follow-through selling after the initial reaction to Scott Bessent's nomination as US Treasury Secretary amid bets for a less dovish Federal Reserve (Fed). This turns out to be another factor pushing the USD/CAD pair higher, though the upside potential seems limited.
Investors remain concerned about geopolitical risks stemming from the Russia-Ukraine war and the ongoing conflicts in the Middle East, which could potentially impact Oil supplies. Furthermore, rising fuel demand in China and India – the world's top and third-largest importers, respectively – should limit any meaningful downside for Crude Oil prices.
Meanwhile, Bessent's conservative views on fiscal policy trigger a sharp decline in the US Treasury bond yields. This might hold back the USD bulls from placing aggressive bets and keep a lid on any further gains for the USD/CAD pair. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out.
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.
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