USD/CAD edges higher after registering modest losses in the previous session, trading around 1.4030 during the Asian hours on Monday. The pair advances as the commodity-linked Canadian Dollar (CAD) struggles amid lower crude Oil prices.
West Texas Intermediate (WTI) Oil price retreats after posting more than 2% gains in the previous session, trading around $59.30 per barrel at the time of writing. Crude Oil prices depreciate amid looming oversupply concerns.
Russia’s Novorossiysk port has resumed oil loading operations after a two-day shutdown triggered by a Ukrainian drone strike. Meanwhile, the IEA has warned that the global oil market could face a substantial surplus next year, potentially around 4 million bpd, as both OPEC and non-OPEC producers increase output amid weakening demand growth.
Traders expect the Bank of Canada (BoE) to hold steady on interest rates through the end of 2026 at a minimum, but that could change if economic conditions deteriorate further. The BoC Consumer Price Index (CPI) data for October is scheduled to be released later in the day.
The USD/CAD pair also holds gains as the US Dollar (USD) gains amid cautious remarks by US Federal Reserve (Fed) officials. Kansas City Fed President Jeffery Schmid said on Friday that monetary policy should “lean against demand growth,” adding that current Fed policy is “modestly restrictive,” which he believes is appropriate.
The CME FedWatch Tool suggests that financial markets are now pricing in a 46% chance that the Fed will cut its benchmark overnight borrowing rate by 25 basis points (bps) at its December meeting, down from the 67% probability that markets priced a week ago.
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.