The USD/CAD pair edged higher to near 1.4045 in Asian trading hours on Tuesday. The Canadian dollar (CAD) is softening against the US dollar (USD) due to a drop in crude oil prices. Canadian Consumer Price Index (CPI) inflation data for September will be the highlight later on Tuesday. Also scheduled to speak is Federal Reserve (Fed) Bank Governor Christopher Waller.
Crude oil prices fall to a five-month low as fears of a supply glut mount, undermining the commodity-linked Loonie and creating tailwinds for the pair. It is worth noting that Canada is the largest oil exporter to the US and lower crude oil prices tend to have a negative impact on the CAD value.
Meanwhile, trade tensions between the US and China are easing after US President Donald Trump said on Friday that 100% tariffs on China are unsustainable and that he still plans to meet Chinese President Xi Jinping. Investors will closely monitor further updates on US-China trade talks. Any sign of de-escalating trade tensions between the world’s two largest economies could lift the greenback against the CAD in the near term.
However, the US federal government shutdown has entered its fourth week with no clear end in sight, marking the third-longest funding shutdown in modern history. The GOP-backed bill failed to pass the Senate for the 11th time on Monday. The 50-43 vote fell mostly along party lines. Concerns that the extended US government shutdown could affect economic activity could drag the USD down.
Frequently asked questions about the Canadian dollar
The key factors that drive the Canadian dollar (CAD) are the interest rate level set by the Bank of Canada (BoC), the price of oil, Canada’s largest export, the health of the 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 riskier 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 affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects interest rates for everyone. The main objective of the BoC is to maintain inflation at 1-3% by adjusting the interest rate up or down. Relatively higher interest rates tend to be positive for CAD. The Bank of Canada can also use quantitative easing and tightening to affect credit conditions, the former CAD negative and the latter CAD positive.
The price of oil is a key factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so the oil price tends to have an immediate impact on the CAD value. Generally, if the price of oil rises, so does the CAD, as aggregate demand for the currency rises. 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 also supports the CAD.
While inflation has always traditionally been thought of as a negative factor for a currency as it lowers the monetary value, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure 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 can encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if the economic data is weak, the CAD is likely to fall.