- USD/CAD loses ground as oil prices rise due to escalating tensions in the Middle East.
- A rocket attack on the Israeli-occupied Golan Heights has raised concerns about crude oil supplies.
- US Dollar Weakens as Fed Could Make Three Rate Cuts in 2024
The USD/CAD retreats from an eight-month high of 1.3849 hit in the previous session, trading around 1.3820 during Asian hours on Monday. Rising oil prices support the Canadian Dollar (CAD) and put downward pressure on the USD/CAD pair.
West Texas Intermediate (WTI) crude oil is trading around $76.80 per barrel at the time of writing. This rise is driven by concerns about a possible escalation in the Middle East following a rocket attack on the Israeli-occupied Golan Heights, which Israel and the United States (US) have blamed on the Lebanese armed group Hezbollah, according to Reuters.
Israel’s security cabinet on Sunday authorized Prime Minister Benjamin Netanyahu’s government to determine the “manner and timing” of a response to the rocket attack that killed 12 teenagers and children on Saturday.
In addition, the US Dollar (USD) is facing challenges from slowing inflation and cooling labor market conditions in the United States (US), which has fueled expectations of three rate cuts this year by the Federal Reserve (Fed), starting in September.
These expectations were reinforced by the release of the US Personal Consumption Price Index (PCE) on Friday, which indicated a modest increase in inflation in June and provided further signs of easing price pressures.
The Price Index of PCE The U.S. consumer price index rose 2.5% year-over-year in June, slightly below the 2.6% increase in May, meeting market expectations. On a monthly basis, the PCE Price Index rose 0.1% after being unchanged in May.
U.S. core PCE inflation, which excludes volatile food and energy prices, also rose to 2.6% in June, consistent with the increase in May and above the 2.5% forecast. The core PCE Price Index rose 0.2% month-on-month in June, compared with 0.1% in May.
Canadian Dollar FAQs
The key factors determining the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s main export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors include market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or looking for safe assets (risk-off), with risk-on being positive for the 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) exerts significant influence over the Canadian dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC’s main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are generally positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the 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. Generally, if the price of oil rises, the CAD rises as well, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.
Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually occurred in modern times, with the relaxation of cross-border capital controls. Higher inflation typically leads central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
The released macroeconomic data measures 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 confidence surveys can 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 can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
