USD/CAD trades with negative bias below multi-year peak, around mid-1.4400s
- USD/CAD attracts intraday sellers after hitting a fresh multi-year top amid a modest USD downtick.
- Oil prices remain below a multi-week high, undermining the Loonie and lending support to the pair.
- Traders also seem reluctant and opt to wait for US President-elect Donald Trump’s inaugural address.
The USD/CAD pair retreated slightly after touching its highest level since March 2020 during the Asian session on Monday and for now, seems to have snapped a two-day winning streak. Spot prices currently trade around the mid-1.4400s, down 0.10% for the day amid a modest US Dollar (USD), though the downtick lacks follow-through or a bearish conviction.
Signs of abating inflation in the US increased the chances that the Federal Reserve could cut interest rates twice this year and failed to assist the USD to capitalize on Friday's positive move. Apart from this, a generally positive risk tone around the equity markets is seen weighing on the safe-haven buck and the USD/CAD pair. Investors, however, expect that US President-elect Donald Trump’s protectionist policies could boost inflation. This might force the Fed to adopt a more hawkish stance, warranting some caution for the USD bears.
Meanwhile, easing tensions in the Middle East, along with expectations that US President-elect Donald Trump could relax curbs on Russia in exchange for a deal to end the Ukraine war, offset worries about tighter supplies and weigh on Crude Oil prices. This, in turn, could undermine the commodity-linked Loonie and contribute to limiting losses for the USD/CAD pair. Traders also seem reluctant and opt to wait for Trump's inaugural address later today, making it prudent to wait for some follow-through selling before positioning for deeper losses.
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.