USD/CAD dips as weak US NFP data and rising Oil prices strengthen Loonie

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The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday as the Greenback loses momentum following softer-than-expected US Nonfarm Payrolls (NFP) data.

USD/CAD weakens as soft US Nonfarm Payrolls weigh on the US Dollar.
Surging Oil prices linked to the escalating US-Iran conflict support the commodity-linked Loonie.
Canada’s Ivey PMI rebounds into expansion territory in February.

The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday as the Greenback loses momentum following softer-than-expected US Nonfarm Payrolls (NFP) data. At the same time, elevated Oil prices driven by the escalating US-Iran conflict provide additional support to the commodity-linked Loonie.

At the time of writing, USD/CAD trades around 1.3607, down nearly 0.45% on the day and hovering near its lowest level in three weeks. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.00, easing from the daily high near 99.43.

Despite the intraday pullback, the DXY remains on track for a weekly advance as the escalating US-Iran conflict revives safe-haven demand for the USD.

US NFP fell by 92K in February, missing expectations for a 59K increase. January’s reading was revised lower to 126K from 130K. The Unemployment Rate ticked up to 4.4% from 4.3% in the previous month.

However, not all components of the report were weak. Average Hourly Earnings rose 0.4% MoM in February, matching the previous reading and beating expectations of 0.3%, while annual wage growth accelerated to 3.8% YoY, up from 3.7%.

Separately, US Retail Sales declined 0.2% MoM in January, compared with expectations for a 0.3% drop, following a flat reading in December. The Retail Sales Control Group, which feeds directly into GDP calculations, rose 0.3%, while Retail Sales excluding Autos remained unchanged at 0%.

The weaker-than-expected NFP data reignited concerns about a cooling US labor market, keeping the Federal Reserve (Fed) cautious as policymakers continue to highlight persistent inflation risks.

Meanwhile, inflation fears have received an additional boost from surging Oil prices amid ongoing supply disruptions through the Strait of Hormuz. West Texas Intermediate (WTI) Crude Oil is up over 30% so far this week and trades around $88.75 per barrel at the time of writing.

Qatar’s Energy Minister Saad al-Kaabi warned that a halt in Gulf energy exports could push crude prices as high as $150 per barrel.

For Canada, a major energy exporter, higher Oil prices tend to support the domestic currency as stronger crude prices boost national income and the country’s trade balance.

On the domestic data front, Canada’s Ivey Purchasing Managers Index (PMI) climbed to 56.3 in February from 47 previously, signaling a return to expansion in business activity. The seasonally adjusted Ivey PMI also improved to 56.6, up from 50.9.

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.