- USD/CAD receives support as commodity-linked CAD struggles due to lower oil prices.
- Crude oil prices plummet as fears of a possible all-out war in the Middle East subside.
- The CME FedWatch tool suggests a 95.8% probability of a 25 basis point rate cut in November.
USD/CAD maintains its position near 1.3890 during Asian trading hours on Tuesday, close to its three-month high of 1.3908, recorded on Monday. The commodity-linked Canadian Dollar (CAD) faces challenges due to lower oil prices as Canada is the largest exporter of crude oil to the United States (US).
The West Texas Intermediate (WTI) oil price is trading around $67.50 at the time of writing. Oil prices have fallen sharply as limited military operations have eased fears of a possible all-out war in the Middle East. Iranian Foreign Ministry spokesman Esmaeil Baghaei indicated the possibility of using “all available tools” to respond to Israel’s recent attacks on military targets in Iran, according to Reuters.
On Monday, Governor Tiff Macklem provided more details on the Bank of Canada’s (BoC) decision to implement an aggressive interest rate cut last week, explaining that the easing is reasonable given the aggressive increases in borrowing costs aimed at control inflation in recent years. Macklem also noted that the central bank will need to “figure out” the neutral rate that neither stimulates nor restricts economic activity, according to Bloomberg News.
The US Dollar (USD) strengthens as last week’s positive economic data suggests continued resilience in the US economy. This reinforces expectations of nominal interest rate cuts by the Federal Reserve (Fed). in November. The CME FedWatch tool indicates a 95.8% probability of a 25 basis point rate cut in November, with no anticipation of a reduction greater than 50 basis points.
Additionally, the US Dollar receives support amid higher US bond yields. This rise is driven by market sentiment increasingly favoring former President Donald Trump in the upcoming US presidential election. and expectations that the Fed may take a more cautious stance on future rate cuts. According to polling site FiveThirtyEight, Trump’s chance of winning the US election has increased to 52% compared to 48% for Vice President Kamala Harris.
The Canadian Dollar FAQs
The key factors that determine the price of 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 product, 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 are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the 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 usually 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 also rises, 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 happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.
The published macroeconomic data measures the health of the economy and may 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 may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if 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.
