USD/CAD trades with positive bias around mid-1.4200s as Oil prices tumble to multi-year low
- USD/CAD attracts some buyers for the second straight day amid a combination of supporting factors.
- Tumbling Oil prices, domestic political uncertainty, and Friday's dismal jobs data undermine the Loonie.
- The risk-off mood benefits the USD's relative safe-haven status and also acts as a tailwind for the pair.
The USD/CAD pair attracts some follow-through buying for the second consecutive day on Monday and looks to build on last week's modest recovery from the 1.4030-1.4025 region or year-to-date low. Spot prices currently trade around mid-1.4200s, up nearly 0.25% for the day, though bulls might wait for a sustained strength beyond the 100-day Simple Moving Average (SMA) before placing fresh amid mixed fundamental cues.
Crude Oil prices slump to a four-year low amid growing concerns that US President Donald Trump's sweeping reciprocal tariffs would trigger an all-out global trade war and weaken fuel demand. Moreover, eight OPEC+ members unexpectedly advanced their plan to phase out production cuts, sparking oversupply concerns and further weighing on the black liquid. Apart from this, political uncertainty ahead of the Canadian snap election on April 28, along with Friday's disappointing domestic employment data, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair.
Meanwhile, the risk of a further escalation of US-Canada trade tensions suggests that the path of least resistance for the currency pair is to the upside. In fact, Canadian Prime Minister Mark Carney said on Thursday that the previously announced retaliatory tariffs will remain in effect and that Canada will impose 25% tariffs on all vehicles imported from the US that are not compliant with the USMCA trade deal. This, along with the emergence of some US Dollar (USD) buying following the Asian session dip, turns out to be another factor offering additional support to the USD/CAD pair.
The USD preserves Friday's modest recovery gains from a multi-month low on the back of stronger-than-expected US Nonfarm Payrolls (NFP) report and Federal Reserve (Fed) Chair Jerome Powell's hawkish remarks. Adding to this, the prevalent risk-off environment is seen benefiting the Greenback's relative safe-haven status. Any meaningful USD appreciation, however, still seems elusive in the wake of bets that a tariffs-driven US economic slowdown might force the Fed to resume its rate-cutting cycle soon. This, in turn, might keep a lid on the USD/CAD pair, warranting caution for bulls.
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.