USD/CAD struggles near 1.4000 as recovering Oil prices support Loonie amid subdued USD demand

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USD/CAD remains on the defensive on Monday amid a combination of negative factors.
Recovering Crude Oil prices and Friday’s upbeat Canadian jobs data underpin the Loonie.
The USD struggles to attract any meaningful buyers and exerts some pressure on the pair.

The USD/CAD pair trades with a negative bias for the second straight day on Monday, though it lacks follow-through selling and holds above the 200-day Simple Moving Average (SMA) through the Asian session. Spot prices currently hover around the 1.4000 psychological mark and remain well within striking distance of the highest level since April 10, touched on Friday.

Crude Oil prices open with a bullish gap at the start of a new week and recover a part of last week's slump to a five-month low in reaction to US President Donald Trump's softer tone on the 100% China tariff threat. This helps ease fears of a worsening US-China trade conflict and fuel demand concerns. Apart from this, Friday's better-than-expected Canadian employment report, which showed that the economy added a surprise 60,400 jobs in September, offers some support to the commodity-linked Loonie and acts as a headwind for the USD/CAD pair.

Meanwhile, the US Dollar (USD) struggles to attract any meaningful buyers and consolidates Friday's corrective slide as the risk-on impulse undermines demand for safe-haven assets. Apart from this, bets that the US Federal Reserve (Fed) will cut interest rates two more times this year and a prolonged US government closure keep the USD bulls on the defensive. This, in turn, is seen as another factor capping the upside for the USD/CAD pair. However, persistent trade-related uncertainties may deter traders from placing aggressive directional bets.

From a technical perspective, last week's breakout through the 200-day SMA and the 1.4000 psychological mark for the first time since April was seen as a key trigger for the USD/CAD bulls. This, in turn, suggests that any further corrective slide could be seen as a buying opportunity near the 1.3980-1.3975 area (200-day SMA), which should limit the downside near the 1.3940-1.3935 horizontal support. Moreover, relatively thin liquidity on the back of a holiday in the US and Canada warrants some caution amid a mixed fundamental backdrop.

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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