USD/CAD extends losing streak to near 1.4350 due to improved Oil prices
- USD/CAD depreciates as Oil prices rise, driven by renewed expectations of further policy easing by the Federal Reserve.
- Canadian Prime Minister Justin Trudeau has no intentions of stepping down during the Christmas holidays.
- The US Dollar struggles as softer US PCE data revives hopes of the Fed’s further rate cuts next year.
USD/CAD continues to lose ground for the third successive session, trading around 1.4360 during the Asian hours on Monday. As Canada is the largest oil exporter to the United States (US), the Canadian Dollar (CAD) gains upward momentum, supported by rising crude Oil prices following US data that indicated cooling inflation. This development has revived expectations of further policy easing next year, which could bolster global economic growth and increase Oil demand.
In the political arena, Canadian Prime Minister Justin Trudeau has no plans to resign over the Christmas holidays, according to the Globe & Mail. Trudeau currently leads a minority government, and all opposition parties have pledged to introduce a no-confidence motion that would trigger an election when Parliament reconvenes in six weeks.
In the United States, President-elect Donald Trump has announced several key appointments to his administration. Scott Bessent will lead the Treasury, Howard Lutnick will become Commerce Secretary, and Kevin Hassett will head the National Economic Council. Additionally, Andrew Ferguson has been appointed to chair the Federal Trade Commission, while Jacob Helberg, a senior advisor to Palantir CEO Alex Karp, has been nominated as Secretary of State for Economic Growth, Energy, and Environment, as reported by Business Insider.
The US Dollar (USD) received downward pressure after lower-than-expected Personal Consumption Expenditures Price Index (PCE) data from the United States (US) was released on Friday. The inflation report showed that core PCE inflation year-over-year, the Fed’s preferred inflation measure, rose steadily by 2.8% in November, slower than estimates of 2.9%. The monthly core inflation grew moderately by 0.1%, against estimates of 0.2% and the prior release of 0.3%.
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.