USD/CAD hesitates below 1.3800 ahead of US employment, industrial data
- The US Dollar loses momentum, but maintains its positive trend against a softer Loonie.
- A nearly $2 decline in Crude prices is adding negative pressure on the CAD.
- Investors are wary of placing large US Dollar bets ahead of the US JOLTS and Factory Orders releases.
The US Dollar appreciates for the third consecutive day on Wednesday, buoyed by higher US yields, while the decline in Oil prices keeps weighing on the commodity-sensitive Loonie. The pair, however, is struggling to breach the 1.3800 level, ahead of the US JOLTS Job Openings and Factory Orders data.
A somewhat brighter market mood is weighing on the US Dollar. The US Dollar Index, which measures the value of the USD against a basket of currencies, has turned lower on the day, although it keeps most of the gains taken on Tuesday.
Lower Oil prices are supporting the pair, as the US benchmark WTI reversed from Monday’s highs at $65.77 to levels right above $64.00 at the time of writing, on news reporting that OPEC+ countries might be considering another output hike in October. Oil is Canada's main export, and a significant decline in prices tends to have a negative pressure on the CAD.
In the US, later today, the focus will be on the US JOLTS Job Openings and Factory Orders data, which are expected to show further signs of economic slowdown and endorse the view of a Fed rate cut in September. If these expectations are confirmed, the US Dollar might extend its reversal.
Canadian Dollar FAQs
The key factors driving 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 taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. 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) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge 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 sentiment surveys can all 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 put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.