USD/CAD continues its winning streak for the fifth day in a row, trading around 1.4110 in Asian hours on Wednesday. The pair is gaining ground as the commodity-linked Canadian dollar (CAD) faces challenges amid weakening oil prices. It is important to note that Canada is the largest exporter of crude oil to the United States (US).
The West Texas Intermediate (WTI) oil price is extending its losses for the third consecutive session and is trading around $60.00 per barrel at the time of writing. Crude oil prices fall as a sharp increase in inventories reinforces concerns about oversupply. API Weekly Crude Oil Stocks rose by 6.5 million barrels last week, far beating expectations for a 2.4 million barrel move and registering the biggest weekly increase since early July.
The upside of the USD/CAD pair may be limited as the US dollar (USD) struggles due to the ongoing US government shutdown. The deadlock has now entered its sixth week and is poised to become the longest federal funding shutdown in US history after the Senate once again failed to pass a short-term funding bill. The latest attempt to resolve the conflict, Republican-backed temporary legislation, was rejected by the Senate for the 14th time on Tuesday.
However, the greenback received support from the cautious sentiment surrounding the US Federal Reserve’s (Fed) policy stance for December. Fed Chairman Jerome Powell stated during last week’s press conference after the meeting that another rate cut in December remains uncertain. Powell also warned that policymakers may have to take a wait-and-see attitude until the release of new official data resumes.
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 price of oil 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.