USD/CAD pierces seven-month highs at 1.4080 in risk-off markets
- The US Dollar appreciates against the CAD, reaching fresh seven-month highs above 1.4080
- Risk aversion and dwindling hopes of a Fed cut in December are boosting demand for the USD.
- Oil prices are pulling back from highs, adding pressure on the Loonie.
The US Dollar rallies for the fourth consecutive ¡day against its Canadian counterpart on Tuesday. The pair extends gains reaching fresh seven-month highs above 1.4080 during the European trading session, buoyed by a risk-averse market mood, while the Loonie struggles with Crude prices pulling back from lows.
The dismal market sentiment underpinning demand for safe-haven assets like the US Dollar, which remains among the best performing currencies on Tuesday, on investors rush for safety in the absence of key macroeconomic releases, with European equity indexes posting losses beyond 1% and US Futures in the red.
Beyond that, the hawkish message from Federal Reserve Chairman Jerome Powell, which puts further monetary easing this year into question, has prompted investors to dial back hopes of another rate cut in December, providing additional support to the Greenback.
The Canadian Dollar, on the other hand, remains vulnerable as Crude prices, Canada's main export, retreat further. The price of the benchmark West Texas Intermediate barrel has extended its decline from last week's highs near $62.50 to levels right above the psychological $60.00 level at the time of writing.
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.