The USD/CAD pair is moving slightly after posting small gains in the previous session, trading around the 1.3800 level during Asian business hours on Monday. The pair may come under pressure as the commodity-linked Canadian dollar draws support from higher oil prices, given Canada’s status as the largest oil exporter to the United States.
West Texas Intermediate (WTI) crude oil is trading near $57.00 per barrel at the time of writing, with prices advancing amid concerns about potential supply disruptions. Tensions have risen between the United States and Venezuela after the United States reportedly pursued another ship near Venezuelan waters after seizing two oil tankers this month.
Meanwhile, the focus also remains on Eastern Europe, where Ukraine struck a Russian tanker in the Mediterranean for the first time, following previous attacks on Lukoil facilities in the Caspian Sea. US and Ukrainian officials said Sunday that the talks in Miami were “productive and constructive,” although no progress was announced.
The downtrend for USD/CAD could be restricted as the US Dollar (USD) could rise due to dovish sentiment surrounding the Federal Reserve (Fed) policy outlook. Cleveland Fed President Beth Hammack said Sunday that monetary policy is well positioned to pause and assess the effects of 75 basis point interest rate cuts on the economy during the first quarter, according to Bloomberg.
The CME FedWatch tool shows a 79.0% probability of holding interest rates at the Fed’s January meeting, up from 75.6% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 21.0% from 24.4% a week ago.
The University of Michigan reported Friday that its consumer confidence index was revised down to 52.9 in December from 53.3 previously. The consumer expectations index fell to 54.6 from 55.0. Meanwhile, one-year inflation expectations were revised to 4.2% from 4.1% in both the initial estimate and the previous month.
Frequently asked questions about the Canadian dollar
The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
