USD/CAD stays above 1.4000 near six-month highs as Oil prices drop

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USD/CAD moves little after reaching a six-month high of 1.4033 in the previous session, trading around 1.4020 during the Asian hours on Friday. The pair gained around 0.5% on Thursday as the commodity-linked Canadian Dollar (CAD) faced challenges amid lower crude Oil prices.

USD/CAD remains steady after gaining 0.5% in the previous session amid lower Oil prices.
WTI price struggled as geopolitical risk premiums eased following the recent Israel-Hamas agreement.
San Francisco Fed President Daly said inflation eased more than expected, and the Fed anticipates further risk-management cuts.

Lower Oil prices put downward pressure on the CAD as Canada is the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price is trading around $61.20 per barrel at the time of writing. Oil prices came under pressure as geopolitical risk premiums declined following the recent agreement between Israel and Hamas on the first phase of a ceasefire plan.

The USD/CAD pair inches lower as the US Dollar (USD) halts its four-day winning streak. However, the pair may further appreciate as the Greenback gains ground amid increased risk aversion, driven by the ongoing government shutdown. The US Senate remained deadlocked on legislation to end the government shutdown on Friday.

However, the Greenback may face challenges due to prevailing dovish sentiment surrounding the US Federal Reserve’s (Fed) policy outlook. Fed Bank of San Francisco President Mary Daly said on Friday that inflation has come in much less than she had feared. Daly further stated that the US central bank is projecting additional cuts in risk management.

Fed Governor Michael Barr said that the current outlook poses challenges for judging the stance of monetary policy and deciding the right path forward. Barr also noted that the Fed rate cut in September was appropriate and the current policy rate is still modestly restrictive. He added that it's hard to judge at this point whether the federal government shutdown will leave an imprint on the overall economy.

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.

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