The USD/CAD pair posts modest losses near 1.3990 during the early Asian session on Thursday. The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on a rise in crude oil prices. The Canadian Retail Sales and US Kansas Fed Manufacturing Activity reports will be released later on Thursday.
Oil prices rise to near a two-week high after the US hit Russia’s major oil companies with sanctions, supporting the commodity-linked Loonie and acting as a headwind for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
Canadian Prime Minister Mark Carney said on Thursday that the decades-long process of an ever-closer economic relationship between the Canadian and US economies is over. Traders will closely monitor the developments surrounding US-Canada trade tensions.
US President Donald Trump on Tuesday rebuffed a request by leading Democratic lawmakers to meet until the four-week-old US government shutdown ends. The release of key US economic data from the Bureau of Labor Statistics and the Census Bureau is suspended, complicating decision-making for the Federal Reserve (Fed).
Nonetheless, the Fed is expected to cut its benchmark interest rate by 25 basis points (bps) in the October and December policy meetings. This, in turn, weighs on the Greenback against the CAD. Fed funds futures imply a 97% chance of a 25 bps rate reduction, according to LSEG data.
Traders will take more cues from Canada’s Retail Sales data later in the day. The Retail Sales are projected to show an increase of 1.0% MoM in August, while the Retail Sales ex Autos are estimated to show a rise of 1.2% MoM during the same period. A hotter-than-expected rise in Retail Sales could lift the CAD in the near term.
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.
