The USD/CAD pair holds its position after recording modest gains in the previous session, trading around 1.3790 during Asian hours on Thursday. The US dollar remains cautious in the market ahead of the release of the delayed US Consumer Price Index (CPI) report scheduled for later today, which is expected to provide further insight into how price pressures are evolving.
Federal Reserve (Fed) Governor Christopher Waller, who is being considered for the position of head of the central bank, reiterated his dovish stance on interest rates during a CNBC forum. “Since inflation is still high, we can take our time – there is no rush to get down,” Waller said. “We can steadily lower the interest rate towards neutral.”
The CME FedWatch tool notes that Fed funds futures assign an implied probability of 75.6% that interest rates will be held at the US central bank’s next meeting in January, up from about 74% a week ago.
USD/CAD may rise as the commodity-linked Canadian dollar faces challenges amid falling oil prices. West Texas Intermediate (WTI) crude oil is trading lower near $56.00 per barrel at the time of writing. However, the downward trend in oil prices could be limited amid escalating geopolitical tensions.
The United States ordered a complete halt to maritime traffic, including sanctioned oil tankers traveling to and from Venezuela. Meanwhile, Washington is seeking to impose tougher sanctions on the Russian energy sector to support peace negotiations over Ukraine, raising concerns about possible global supply disruptions.
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.
