USD/CAD attracts some sellers to near 1.4350 ahead of US PPI release
- USD/CAD edges lower to around 1.4355 in Tuesday’s early Asian session.
- A rise in crude oil prices boosts the commodity-linked Loonie.
- The stronger-than-expected US December NFP dampened the outlook for Fed rate cuts, which might lift the USD.
The USD/CAD pair weakens to near 1.4355 during the early Asian session on Tuesday. A rise in crude oil prices amid further US sanctions to Russian oil underpins the commodity-linked Canadian Dollar (CAD) against the Greenback. Later on Tuesday, the US Producer Price Index (PPI) for December will take center stage.
Crude oil prices extend the rally to the highest in four months following the introduction of a fresh package of sanctions against Russia by the Biden administration. This, in turn, provides some support to the Loonie and acts as a headwind for the pair. It's worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.
On the other hand, the prospect of fewer interest rate cuts by the US Federal Reserve (Fed) this year might boost the Greenback. Friday’s data showed US job growth unexpectedly accelerated in December and the Unemployment Rate fell to 4.1%, supporting the case for delaying the easing cycle this year. Markets are now pricing in one rate cut from the Fed in 2025, down from roughly two quarter-point cuts priced at the start of the year.
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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