USD/CAD extends gains beyond 1.4000 as Oil’s recovery loses steam

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The US Dollar is trading higher for the second consecutive day against the Canadian Dollar, reaching levels past 1.4000 during the European morning trading.

The US Dollar pops up above 1.4000 against the CAD but remains below November highs near 1.4150.
Oil prices ease amid hopes of a peace deal in Ukraine, weighing on the CAD.
BoC-Fed monetary policy divergence is likely to cap US Dollar rallies.

The US Dollar is trading higher for the second consecutive day against the Canadian Dollar, reaching levels past 1.4000 during the European morning trading. A recent pullback in Crude prices, Canada’s main export, and a cautious market mood are offsetting hopes of immediate Fed cuts and providing some support to the US Dollar.

Oil prices have lost nearly $1 after pulling back from $59.85 high on Monday, to trade at the $59.00 area at the time of writing, as the US special envoy, Steve Witkoff, heads to Moscow to talk about peace in Ukraine with Russian President Vladimir Putin.

The pair, however, remains well below the November 21 peak, near 1.4150. Upbeat Gross Domestic Product (GDP) figures from Canada released on Friday prompted investors to reassess their bets on a Bank of Canada interest rate cut next week and sent the Canadian Dollar surging.

In the US, by contrast, manufacturing activity data, as measured by the US ISM Manufacturing Purchasing Managers’ Index, showed that the sector contracted for the ninth consecutive month. Furthermore, new orders declined, highlighting the downbeat near-term prospects, while employment fell and the Prices Paid Index rose.

These figures add pressure on the US Federal Reserve to lower borrowing costs further in the coming months. Investors are pricing in a nearly 90% chance of a quarter-point rate cut next week and two or three more cuts next year. This is triggering a CAD-supportive monetary policy divergence and acting as a headwind for US Dollar rallies.

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.