- USD/CAD has retreated from an eight-month high of 1.3889 hit on Thursday.
- The slight increase in oil prices is providing support to the commodity-linked Canadian dollar.
- The pair’s downside could be limited due to rising risk aversion amid growing concerns about the US economy.
USD/CAD is moving lower towards 1.3860 during the Asian session on Friday. However, the USD/CAD pair is holding its position near an eight-month high of 1.3889 recorded on Thursday. The commodity-linked Canadian Dollar (CAD) is holding slight gains on the back of a modest rise in crude oil prices as Canada is the largest exporter of crude oil to the United States (US).
The West Texas Intermediate (WTI) crude oil price is up slightly towards $76.50 per barrel at the time of writing. The crude oil price may find support on supply risks arising from rising geopolitical tensions in the Middle East, despite ongoing global concerns over oil demand.
The downside in USD/CAD could be limited as the US Dollar (USD) may advance against its peers due to rising risk aversion. Recent labor and manufacturing market data have created a complex scenario with an economic slowdown in the US and rising expectations of a rate cut by the Federal Reserve. The CME FedWatch tool shows that traders fully anticipate a 25 basis point rate cut on September 18.
The US ISM manufacturing Purchasing Managers’ Index (PMI) fell to an eight-month low of 46.8 in July, compared with the previous reading of 48.5 and a forecast for a rise to 48.8. US initial jobless claims for the week ended July 26 rose to 249K from 235K in the previous week, exceeding the forecast rise to 236K.
Traders are likely to keep a close eye on upcoming US Nonfarm Payrolls and Average Hourly Earnings data for July, due later in the American session, for insights into the US labor market.
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.
