Canadian Dollar weakens on falling oil prices amid US-Iran talk hopes
- USD/CAD edges higher to around 1.4030 in Monday’s early European session.
- Trump announced that fresh talks with Iran would begin on Monday.
- Traders will closely watch the US NFP report, which is due later on Friday.
The USD/CAD pair gathers strength to near 1.4030 during the early European session on Monday. A fall in crude oil prices weighs on the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). The US ISM Manufacturing Purchasing Managers Index (PMI) data will be released later on Monday.
Oil prices drop sharply on hopes of US-Iran talks. US President Donald Trump called off a planned military strike on Iran and said that fresh talks with Tehran would begin later in the day, easing concerns over potential supply disruptions. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the Loonie.
The US employment data will take center stage on Friday. The US Nonfarm Payrolls (NFP) are expected to increase by 91,000 in July, versus 57,000 prior. The Unemployment Rate is projected to jump to 4.3% in July, up from 4.2% in June. If the reports show stronger-than-expected outcomes, this would reinforce bets on a US September rate hike and support the Greenback.
The US Federal Reserve (Fed) decided to leave interest rates unchanged at its July policy meeting last week. Markets have priced in nearly a 64.7% probability of a rate hike in September, down from about 77% before the July Fed meeting, according to the CME FedWatch tool.
Canadian Dollar gains capped as USD/CAD stalls near 1.40
Analysts at Scotiabank note that the Canadian Dollar has drawn support from “the generally softer USD undertone that has developing the past couple of days,” but they add that the currency “is having some trouble progressing through the 1.40 area” in USD/CAD, highlighting lingering resistance despite the improved backdrop.
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.
