USD/CAD treads water above 1.3600 due to thin volumes on US, Canada holidays

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USD/CAD inches lower after three days of gains, trading around 1.3610 during the European hours on Monday. Trading volumes are expected to be subdued as markets are closed amid the United States (US) Presidents’ Day and Canada’s Family Day.

USD/CAD moves little as markets observe holidays amid US Presidents’ Day and Canada’s Family Day.
The commodity-linked Canadian Dollar stays as Crude Oil prices remain flat amid geopolitical caution.
The US Dollar may struggle after softer January CPI strengthened expectations of Fed rate cuts later this year.

Traders are awaiting Canada’s Consumer Price Index (CPI) data due Tuesday, with annual inflation expected to stand at 2.4% in January, the same rate as in the previous month, while monthly inflation is forecast to rise to 0.1% from -0.2% previously.

The commodity-linked Canadian Dollar (CAD) remains subdued against the US Dollar (USD) as Crude Oil prices were little changed, and traders remained cautious amid ongoing geopolitical developments. West Texas Intermediate (WTI) hovers near $62.70 per barrel at the time of writing.

Traders are looking ahead to the second round of US-Iran talks scheduled in Geneva on Tuesday, with Tehran signaling readiness to make nuclear concessions if Washington addresses sanctions. US-brokered Russia-Ukraine negotiations are also set to resume on Tuesday, though expectations for a swift resolution and a return of Russian Oil to global markets remain limited.

The USD/CAD pair moves little as the US Dollar (USD) steadies in holiday-thinned trading. However, the Greenback may struggle as softer January Consumer Price Index (CPI) data reinforced expectations that the Federal Reserve (Fed) may cut rates later this year.

January’s US Nonfarm Payrolls posted the strongest gain in more than a year, while the Unemployment Rate unexpectedly fell, signaling a stabilizing labor market. Investors now shift focus to the latest Fed Meeting Minutes, Q4 GDP figures, and the Fed’s preferred core PCE price index for clearer direction on the monetary policy outlook.

(This story was updated on February 16 at 10:29 GMT to reflect a consensus change in Canada’s annual CPI inflation to 2.4%)

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.