Canadian Dollar edges higher to near 1.3700 amid rising oil prices, US data in focus
- USD/CAD edges lower to around 1.3695 in Friday’s early European session.
- A rise in crude oil prices amid the US-Iran tensions supports the commodity-linked Canadian Dollar.
- Traders await key US inflation data to assess the Fed's monetary policy moving forward.
The USD/CAD pair trades in negative territory near 1.3695 during the early European session on Friday. The Canadian Dollar (CAD) strengthens against the Greenback amid higher crude oil prices. Traders await the Canadian Retail Sales data, along with the advance US Q4 Gross Domestic Product (GDP) report and the US Personal Consumption Expenditures (PCE) Price Index data.
Persistent geopolitical risks boost crude oil prices and provide some support to the commodity-linked Loonie. US President Donald Trump said on Thursday that Iran had 10 to 15 days at most to strike a deal over its nuclear program, per Bloomberg. Trump added that "really bad things will happen" if no deal is reached with Iran and the US will get a deal one way or the other. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
On the other hand, stronger-than-expected US economic data and a more hawkish Federal Reserve (Fed) outlook could underpin the US Dollar (USD) against the CAD. The US Initial Jobless Claims declined to 206,000 for the week ending February 14, according to the US Department of Labor (DOL) on Thursday. This reading came in below the market consensus of 225,000 and down from the previous week’s revised 229,000.
The US Personal Consumption Expenditure (PCE) data, the Fed's preferred inflation gauge, for December will be published later on Friday for clues on US monetary policy. Also, the preliminary reading of the Gross Domestic Product (GDP) for the fourth quarter will be released. A surprise downside to the reports could drag the USD lower in the near term.
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.
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