USD/CAD falls to near 1.3650 due to improving Oil prices
- USD/CAD depreciates as the Canadian Dollar gains ground amid strengthening Oil prices.
- Canada’s Finance Ministry announced the withdrawal of proposed digital services tax to advance broader trade negotiations with the US.
- Traders await US labor market data to gain further impetus on the Fed’s policy stance.
USD/CAD loses ground, trading around 1.3670 during the Asian hours on Monday. The USD/CAD pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support from improving Oil prices. This is important to note that Canada is the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price is trading around $64.70 per barrel at the time of writing. However, the upside of the Crude Oil prices could be limited amid easing fears over supply disruptions, driven by the Middle East ceasefire. Meanwhile, President Donald Trump noted that he might support sanctions relief on Iran if it can be peaceful. Moreover, reports indicated that OPEC+, the Organization of the Petroleum Exporting Countries and its allies, was prepared to increase production by 411,000 barrels per day in August, following a similar hike already planned for July.
Canada's Finance Ministry stated on Sunday that it will “rescind digital services tax to advance broader trade negotiations with the United States (US). Canada's PM Mark Carney and President Donald Trump agreed that parties will resume negotiations to agree on a deal by July 21.
The upside of the USD/CAD pair could be restrained as the US Dollar (USD) struggles, as traders expect that the Federal Reserve (Fed) will cut rates at the September meeting. Data showed on Friday that US Personal Spending unexpectedly fell in May, the second decline this year. Meanwhile, US Personal income dropped by 0.4% in May, the largest decrease since September 2021.
A slew of key US employment figures is scheduled to be released later in the week, which may further offer fresh impetus on the US Federal Reserve’s (Fed) policy outlook. The June US payrolls report is expected to show the economy added 110,000 new jobs, down from 135,000 in May – the estimate range is currently between a high of 140,000 and a low of 75,000. Moreover, Unemployment is anticipated to tick higher to 4.3% from 4.2%.
Canadian Dollar FAQs
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.
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.
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.
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.
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.