USD/CAD dips below 1.4100; downside seems limited amid bullish USD, sliding Oil prices

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USD/CAD edges lower as the USD pauses following the recent rise to a multi-month top.
Reduced December Fed rate cut bets favor the USD bulls and offer support to spot prices.
Sliding Crude Oil prices undermine the Loonie and contribute to limiting losses for the pair.

The USD/CAD pair drifts lower during the Asian session on Friday and now seems to have snapped a two-day winning streak to a nearly two-week high, levels just above the 1.4100 mark, touched the previous day. Spot prices, however, bearish conviction and remain on track to register strong weekly gains amid the underlying bullish sentiment surrounding the US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, advanced to its highest level since late May on Thursday amid reduced bets for another interest rate cut by the US Federal Reserve (Fed). The expectations were reaffirmed by the delayed release of the US NFP report, which showed that the economy added 119,000 new jobs in September compared to consensus estimates for 50,000 and followed the 4,000 decrease (revised from +22,000) in August. This helps ease concerns about the softening labor market and offsets an uptick in the Unemployment Rate to 4.4% from 4.3%.

The USD bulls, however, pause for a breather on the last day of the week amid growing concerns about the weakening economic momentum on the back of the largest-ever US government shutdown. The Canadian Dollar (USD), on the other hand, continues to be undermined by data released earlier this week, which pointed to signs of easing domestic inflation pressures. Furthermore, sustained selling around Crude Oil prices undermines the commodity-linked Loonie and limits the downside for the USD/CAD pair, warranting some caution for bearish traders and positioning for any meaningful decline.

Traders now look forward to the release of monthly Canadian Retail Sales data and flash US PMIs for some impetus later during the North American session. Apart from this, speeches from a slew of influential FOMC members will be scrutinized for cues about the Fed's rate-cut path, which, in turn, will drive the USD demand. This, along with Oil price dynamics, should contribute to producing short-term trading opportunities around the USD/CAD pair heading into the weekend. Nevertheless, spot prices seem poised to register strong weekly gains and remain close to a multi-month peak.

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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