- USD/CAD attracts some sellers on Tuesday and is pressured by a combination of factors.
- The rebound in oil prices benefits the CAD and weighs on the pair amid a weaker USD.
- The decline, however, appears limited as traders appear reluctant ahead of US data.
The USD/CAD pair extends the previous day’s late pullback from the vicinity of the 1.4100 mark and continues to lose ground during the first half of the European session on Tuesday. The intraday decline is sponsored by a combination of factors and drags spot prices closer to the psychological mark of 1.4000 in the last hour.
Despite a ceasefire agreement between Israel and the Lebanon-based militant group Hezbollah, the geopolitical risk premium remains in play amid the worsening conflict between Russia and Ukraine. Apart from this, expectations that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) will further delay plans to increase production are supporting crude oil prices for the second day in a row. This, along with reducing bets on a larger rate cut by the Bank of Canada (BoC) in December, weakens the commodity-linked CAD and puts some pressure on the USD/CAD pair amid a modest fall of the US dollar (USD).
The Dollar Index (DXY), which tracks the greenback against a basket of currencies, fails to build on the overnight rebound from a nearly three-week low amid a rising likelihood of the Federal Reserve (Fed) cutting rates. rates in December. Investors, however, appear convinced that US President-elect Donald Trump’s expansionary policies will reignite inflationary pressures and force the Fed to keep rates higher for a longer period. This, in turn, provides a modest boost to US bond yields and lends support to the USD. Apart from this, concerns about Trump’s tariff plans should limit the Canadian Dollar (CAD) and the USD/CAD pair.
Traders now await the release of US JOLTS job postings for short-term opportunities later during the North American session. Aside from this, this week’s important US macroeconomic data, including the much-watched Nonfarm Payrolls (NFP) report, and Fed Chair Jerome Powell’s speech, should provide some clues about the outlook for interest rates in the US. This, in turn, will play a key role in driving demand for the USD and provide a significant boost to the USD/CAD pair. Investors will also keep a close eye on the crucial OPEC+ meeting on Thursday, which should influence near-term oil price dynamics.
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.
