USD/CAD weakens below 1.3900 as crude oil rebound strengthens Canadian Dollar

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The USD/CAD pair loses ground to near 1.3890 during the Asian trading hours on Friday. The Canadian Dollar (CAD) strengthens against the Greenback amid the rebound in crude oil prices. Traders will take more cues from the US December Industrial Production report and the Fedspeak later on Friday.

USD/CAD softens to around 1.3890 in Friday’s early Asian session.
High crude oil prices support the commodity-linked Canadian Dollar.
The upbeat US economic data boost the Fed rate hold expectation.

Reuters reported on Friday that Ukraine has ramped up attacks on Russian tankers, with at least six tankers targeted by drones and missiles in the Baltic Sea. Rising geopolitical risks boost crude oil prices and provide some support to the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.

On the other hand, signs of improvement in the US labor market, along with the robust Retail Sales data released earlier this week, support the case that the US Federal Reserve (Fed) will keep rates on hold for the next several months. This, in turn, could underpin the Greenback in the near term. Morgan Stanley analysts pushed back their expectations for rate cuts to June and September, from January and April, after the US December jobs data.

Chicago Fed President Austan Goolsbee said Thursday that amid ample evidence of stability in the job market, the central bank should be focused on getting inflation down. Meanwhile, San Francisco Federal Reserve President Mary Daly stated that monetary policy is “in a good place” to respond to economic shifts.

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.