Canadian Dollar consolidates vs USD as rising oil prices and Fed hike bets clash
- USD/CAD struggles to lure buyers as rising crude oil prices continue to underpin the Loonie.
- A softer USD contributes to capping the upside, though Fed rate hike bets help limit losses.
- Traders now look to this week’s US data, starting with ISM Manufacturing PMI on Tuesday.
The USD/CAD pair is hovering around mid-1.3800s during the Asian session on Tuesday, though the lack of follow-through selling warrants caution before positioning for an extension of the previous day's retracement slide from an over two-week top.
A further escalation of tensions between the US and Iran acts as a tailwind for crude oil prices, underpinning the commodity-linked Loonie. Apart from this, a softer US Dollar (USD) turns out to be another factor exerting some pressure on the USD/CAD pair. That said, rising bets for a rate hike by the Federal Reserve (Fed) in September, along with geopolitical uncertainties, could limit deeper losses for the safe-haven Greenback.
Speaking at the annual symposium in Jackson Hole, Wyoming, Fed Chair Kevin Warsh acknowledged that inflation is running hot and hinted on Friday that interest rates could need to move higher if more progress isn’t made on easing price pressures. Traders were quick to react and are now pricing in around a 65% chance that the US central bank will raise borrowing costs at the upcoming September 15-16 policy meeting.
Meanwhile, the US forces on Sunday attacked two Iranian rocket launchers that were preparing to deploy sea mines in the Strait of Hormuz, prompting an Iranian counterattack on American air bases in Jordan. US President Donald Trump threatened more strikes on Iran after the first exchange of direct attacks in a month. This led to a further rise in oil prices, fueling inflation fears and bolstering hawkish Fed expectations.
The outlook, in turn, favors USD bulls, while a deepening US-Canada trade war could act as a headwind for the Canadian Dollar (CAD), backing the case for the emergence of some dip-buying around the USD/CAD pair. Traders now look to this week's key US macro data, scheduled at the start of a new month, starting with the ISM Manufacturing later today, though focus will remain on the US Nonfarm Payrolls (NFP) report on Friday.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair’s failure ahead of the 100-day Simple Moving Average (SMA) at 1.3917 suggests that rallies remain capped, keeping focus on the downside. A sustained break above this barrier would be needed to ease the prevailing bearish pressure and open the way for a more constructive recovery phase. Until then, spot prices seem vulnerable to decline further, with traders likely to watch for fresh lows to define the next demand area.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
