- USD/CAD trades in negative territory near 1.4380 in Tuesday’s early European session.
- A rise in crude oil prices and stronger Canadian job reports support the CAD.
- Investors dial back bets on Fed rate cuts in 2025.
The USD/CAD pair remains weak around 1.4380 during the early European trading hours on Tuesday. The stronger-than-expected Canadian December labor market data and a surge in crude oil prices underpin the Canadian Dollar (CAD) against the Greenback. Traders will take more cues from the US December Producer Price Index (PPI), which will be released later on Tuesday.
Traders have become slightly less confident the Bank of Canada (BoC) will continue cutting interest rates in the January meeting after data on Friday showed that the Canadian economy added more jobs than expected in December. The possibility of an interest rate cut from the BoC on January 29 declined to 61%, down from 70% before the labor market data, according to Reuters.
Furthermore, higher crude oil prices amid wider United States (US) sanctions on Russian oil boost the commodity-linked Loonie, as Canada is the largest oil exporter to the US.
On the US front, the Bureau of Labor Statistics indicated on Friday that Nonfarm Payrolls (NFP) increased by 256,000 jobs in December, the most since March, while the Unemployment Rate fell to 4.1% during the same report period. This reading could reinforce bets that the US central bank will maintain a hawkish stance through most of the year, which might lift the USD. The markets are discounting the chances at 2.7% for a 25 basis points (bps) rate cut at the January 28-29 FOMC meeting, according to the CME FedWatch tool.
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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