USD/CAD climbs to mid-1.3600s as safe-haven buying benefits USD and offsets surging Oil prices
- USD/CAD rebounds from sub-1.3600 levels as USD benefits from the global flight to safety.
- Rallying Crude Oil prices and reduced bets for further BoC rate cuts could support the CAD.
- Dovish Fed expectations could cap any further upside for the buck and the currency pair.
The USD/CAD pair stages a modest recovery from sub-1.3600 levels, or its lowest level since October 2024 touched during the Asian session on Friday and reverses a major part of the previous day's losses. The momentum lifts spot prices to a fresh daily top, closer to mid-1.3600s in the last hour, and is exclusively sponsored by the rebounding US Dollar (USD).
A further escalation of geopolitical tensions in the Middle East, along with persistent trade-related uncertainties, triggers a fresh wave of the global risk-aversion trade. This, in turn, assists the safe-haven buck to gain some positive traction and snap a two-day losing streak to its lowest level since March 2022 touched on Thursday, which, in turn, prompts some short-covering around the USD/CAD pair.
Meanwhile, concerns about supply disruption from the Middle East lead to a sharp rally of more than 9% in Crude Oil prices, to the highest level in almost five months. This, along with diminishing odds for more rate cuts by the Bank of Canada (BoC) and hopes for a US-Canada trade deal, could underpin the commodity-linked Loonie and cap any further appreciating move for the USD/CAD pair.
Furthermore, the growing market acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle in September, bolstered by signs of cooling inflation in the US, might hold back the USD bulls from placing aggressive bets. This makes it prudent to wait for strong follow-through buying before confirming that the USD/CAD pair has bottomed out and positioning for a meaningful recovery.
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.