USD/CAD hovers below 1.3800 amid improved Oil prices ahead of US inflation data
- USD/CAD may struggle as the commodity-linked CAD receives support from improved Oil prices.
- Oil prices rose on improved market sentiment after the Trump administration postponed implementing tariffs on China.
- The CAD may come under pressure as odds of a BoC rate cut strengthen, following Canada’s recent disappointing jobs data.
USD/CAD stays silent after registering gains in the previous three consecutive days, trading around 1.3780 during the Asian hours on Tuesday. The pair may face challenges as the commodity-linked Canadian Dollar (CAD) receives support from improved crude Oil prices. It is important to note that Canada is the largest Oil exporter to the United States (US).
West Texas Intermediate (WTI) Oil price extends its gains for the second successive session, trading around $63.50 per barrel at the time of writing. Crude Oil prices appreciate on improved market sentiment after US President Donald Trump announced late Monday to postpone the implementation of sweeping tariffs on China for an additional 90 days. The decision came just hours before the previous agreement between the world’s two largest economies was set to expire. In response, China’s Commerce Ministry announced it would suspend additional tariffs on US goods for the same period, following Trump’s executive order extending the tariff truce.
However, the Canadian Dollar (CAD) may struggle amid reinforcing odds of the Bank of Canada (BoC) interest rate cuts, driven by the recent disappointing Canadian job data. Additionally, US President Donald Trump’s decision to impose a 35% tariff on Canadian aluminum, along with looming auto-parts duties that threaten Canada’s key manufacturing exports, is adding fresh pressure to the trade-exposed economy.
The USD/CAD pair moves little as traders adopt caution ahead of the US consumer inflation data, due later in the North American session. The July Consumer Price Index (CPI) is forecast to rise 0.2%, slightly below June’s 0.3%, while the annual rate is projected to accelerate for the third consecutive month to 2.8%. Core CPI is also anticipated to pick up to 0.3%.
Traders raise their bets on two interest rate cuts by the US Federal Reserve (Fed) after weaker data on US jobs and PMI. Markets are now pricing in approximately 84% odds of a Fed rate cut at the September meeting, down from 90% a week ago, according to the CME FedWatch tool.
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.