The Canadian Dollar (CAD) remains on the front foot against the US Dollar (USD) on Monday, as a softer Greenback and firmer Oil prices continue to underpin the Loonie. At the time of writing, USD/CAD is trading around 1.3568, its lowest level since January 31, down more than 0.50% on the day.
The Greenback remains under pressure as US President Donald Trump’s unpredictable trade policy, repeated attacks on the Federal Reserve’s (Fed) independence and mounting concerns over the US fiscal outlook weigh on confidence in US policy credibility.
China has urged domestic banks to curb exposure to US Treasuries on market-risk concerns, due to worries over concentration risk and heightened volatility, Bloomberg News reported on Monday, according to people familiar with the matter. The advisory does not apply to China’s government’s sovereign holdings of US Treasuries.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 96.89, extending its decline for a second straight day.
Meanwhile, sustained expectations of further monetary policy easing by the Fed are adding to the downside pressure on the US Dollar, with markets currently pricing in around two rate cuts this year.
Those easing bets were reinforced by softer US labour-market data released last week. The JOLTS survey showed job openings falling to 6.542 million in December, well below the 7.2 million market forecast and down from 6.928 million previously, marking the lowest level since 2020.
At the same time, ADP private payrolls rose by just 22,000 in January, undershooting expectations for 48,000 and slowing from 37,000 in the prior month.
Attention now turns to key US economic releases this week, with the focus squarely on the delayed Nonfarm Payrolls (NFP) report and the Consumer Price Index (CPI). The upcoming data are likely to play a key role in shaping the near-term direction of the US Dollar, as traders gauge the timing of the first interest rate cut this year.
According to the CME FedWatch Tool, markets currently see a 51% probability of a first rate cut in July.
In Canada, last week’s mixed jobs data, with weaker employment but a lower unemployment rate, backs the case for the Bank of Canada (BoC)to hold interest rates for longer.
Against this backdrop, a growing divergence between Fed easing expectations and a more cautious BoC outlook keeps the near-term bias in USD/CAD tilted to the downside.
Oil prices are also lending support to the commodity-linked Loonie, as Canada is a major crude exporter. West Texas Intermediate (WTI) crude is trading near $64.00 per barrel, up around 1% on the day.
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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