Canadian Dollar stands firm near September 16 top vs weak USD amid bullish oil prices

USD/CAD extends its downtrend for the third straight day amid a combination of negative factors.
Declining US bond yields and hopes for Middle East diplomacy weigh on the safe-haven USD.
Bullish oil prices and the BoC’s hawkish shift underpin the Loonie, exerting additional pressure.

The USD/CAD pair attracts sellers for the third straight day, sliding to a fresh low since September 16 during the Asian session on Friday amid a broadly weaker US Dollar (USD). Spot prices, however, recover a few pips from the vicinity of mid-1.3900s as a modest pullback in crude oil prices caps gains for the commodity-linked Loonie. Nevertheless, the pair remains on track to register losses for the third straight week.

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The USD prolongs its corrective slide for the third straight day amid hopes for a diplomatic resolution to end conflicts in the Middle East and a slump in US bond yields. In fact, US Vice President JD Vance sent a direct letter to the secretary of Iran's Supreme National Security Council, Mohsen Rezaei, to restart peace negotiations. Furthermore, Qatar presented Iran with a new draft peace deal. Meanwhile, investors rushed into safe-haven government bonds after weak tech earnings raised concerns that rising AI spending may not deliver sufficient returns. This, in turn, weighs on the buck and the USD/CAD pair.

However, investors remain wary amid escalating hostilities between the Iran-backed Houthi group and Saudi Arabia. Furthermore, threats from the US and Israel to restart attacks after the US midterm elections keep the geopolitical risk premium in play. Apart from this, hawkish Federal Reserve (Fed) expectations help the safe-haven USD attract some buyers in the vicinity of the weekly low. Traders seem convinced that the US central bank will raise borrowing costs in December, and the bets were reaffirmed by Thursday's US macro data, which pointed to a resilient economy and persistent price pressures.

Furthermore, inflation risk stemming from elevated crude oil prices underpins prospects for additional policy tightening by the Fed. Meanwhile, the downside for the Canadian Dollar (USD) seems limited on the back of the Bank of Canada's (BoC) abrupt shift toward monetary tightening following the first rate hike since July 2023 earlier on Wednesday. This might hold back traders from placing any bullish bets on the USD/CAD pair, warranting caution before positioning for any meaningful recovery. Traders now look to the monthly Canadian GDP report and speeches from influential FOMC members for some impetus.

USD/CAD 4-hour chart

Technical Analysis

The USD/CAD pair holds a bearish near-term bias following the recent breakdown and acceptance below the 1.4000 psychological mark. Moreover, spot prices remain well below the 200-period Simple Moving Average (SMA) on the 4-hour chart, suggesting that rallies are likely to stay capped while the pair consolidates beneath this structural barrier.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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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