Canadian Dollar softens as crude oil prices retreat
- USD/CAD gains traction to around 1.3595 in Monday’s early European session.
- Crude oil price retreated after Trump launched Operation Freedom, weighing on the commodity-linked Loonie.
- Hawkish Fed stance could support the US Dollar.
The USD/CAD pair recovers some lost ground near 1.3595 during the early European trading hours on Monday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) on lower crude oil prices. The US and Canadian employment data for April will be the highlights later on Friday.
Crude oil prices pulled back after US President Donald Trump announced the launch of Project Freedom, a move meant to escort ships crossing the Strait of Hormuz. It is worth noting that Canada is a major oil-exporting country, and lower crude oil prices generally have a negative impact on the Canadian Dollar (CAD).
Meanwhile, Trump hinted that the US is having "very positive discussions" with Iran that may lead to a deal. However, uncertainty remains high as the US maintains a heavy military presence in the region.
The US Federal Reserve (Fed) kept interest rates on hold in a range between 3.50% and 3.75% last week, but raised concerns about inflation. The Fed's 8–4 decision to leave the rate unchanged was its most divided since 1992, drawing three dissents from officials who no longer think the bank should communicate a bias towards easing.
During the press conference, Fed Chair Jerome Powell warned that near-term inflation expectations are rising, adding that he would stay on the Board of Governors for an indefinite period, even after his chairmanship ends. A hawkish Fed holding rates could underpin the Greenback against the CAD.
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.