USD/CAD slips to fresh weekly low, further below 1.3500 amid rising oil prices

VaselineOctober 2, 2024

0 3 minutes read

USD/CAD slips to fresh weekly low, further below 1.3500 amid rising oil prices

USD/CAD draws sellers for second straight day, although downside appears limited.
Oil prices rise amid Middle East tensions and support the Loonie, weighing on the major.
Low bets on a 50bps Fed rate cut in November provide support to the USD and the pair.

The USD/CAD pair is extending the previous day’s pullback from the 1.3535-1.3540 region, or a one-week high, and remains under some selling pressure for the second day in a row on Wednesday. The decline drags spot prices to the 1.3475 area during the Asian session and is supported by a modest increase in crude oil prices.

Fears of an all-out war in the Middle East escalated after Iran fired ballistic missiles at Israel on Tuesday in retaliation for the latter’s campaign against its Hezbollah allies in Lebanon. Meanwhile, Israeli Prime Minister Benjamin Netanyahu vowed that Iran would pay for its missile attack. An Israeli attack on Iran’s oil facilities could disrupt oil supplies from the key producing region and act as a tailwind for the black liquid, which underpins the commodity-linked loonie and puts downward pressure on the USD/ CAD

The US dollar (USD), on the other hand, continues to draw support from declining odds for more aggressive policy easing by the Federal Reserve (Fed) and Tuesday’s US macro data, pointing to a resilient labor market. Fed Chairman Jerome Powell said on Monday that he sees two more 25 bps interest rate cuts this year as a benchmark for whether the economy will perform as expected. Adding to these, the Job Openings and Labor Turnover Survey (JOLTS) showed that the number of job openings rose unexpectedly in August to 8.04 million.

This, in turn, helps the USD retain its strong recovery gains over the past two days and could prevent traders from placing aggressive bear bets around the USD/CAD pair. Apart from this, expectations for a further interest rate cut by the Bank of Canada (BoC) should limit gains for the Canadian dollar (CAD) and help limit losses for the currency pair. This makes it prudent to wait for further strong selling before confirming that the recent rally from a multi-month low has exhausted itself.

Investors are now eagerly awaiting the release of the US ADP private sector employment report, which, along with geopolitical developments, will boost USD demand. Apart from this, oil price dynamics could provide a boost to the USD/CAD pair and allow traders to take advantage of short-term opportunities. The focus, however, will remain glued to the closely watched US monthly employment details popularly known as the Nonfarm Payrolls (NFP) report on Friday.

Canadian Dollar FAQ

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 balance of trade, which is the difference between the value of Canada’s exports and imports this one. Other factors include market sentiment – whether investors are taking riskier assets (risk-on) or seeking safe havens (risk-off) – with risk-on being positive for CAD. 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 significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main goal is to keep 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 lending conditions, the former being negative CAD and the latter positive CAD.

The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil tends to have an immediate impact on the value of the CAD. In general, if the price of oil rises and the CAD rises, as the aggregate demand for the currency rises. The opposite is true if the price of oil falls. Higher oil prices also tend to result in a higher probability of a positive trade balance, which also supports the CAD.

While inflation has always traditionally been considered a negative factor for a currency because it decreases 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 prompt central banks to raise interest rates, which draws more capital inflows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.

Macroeconomic data highlights the health of the economy and can impact the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer sentiment surveys can all influence CAD direction. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it can encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

VaselineOctober 2, 2024

0 3 minutes read

Canadian Dollar FAQ

Vaseline

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