Canadian Dollar remains steady as oil prices continue to recover
- USD/CAD moves little as recovering WTI prices enhance Canada’s export revenues.
- Democratic election victories spark gridlock expectations and hopes for Iran diplomacy, keeping the safe-haven dollar subdued.
- Traders await key US employment data to gauge the Fed's December rate stance.
USD/CAD moves little after registering modest gains in the previous day, hovering around 1.4010 during Asian hours on Friday. The pair may lose ground as the commodity-linked Canadian Dollar (CAD) gains support from higher oil prices. As one of the world's largest oil producers and a major exporter to the United States (US), Canada benefits directly from rising crude markets. Higher oil prices traditionally strengthen the CAD by improving the country's export revenues and terms of trade, whereas falling prices tend to exert downward pressure on the currency.
Meanwhile, West Texas Intermediate (WTI) crude has gained traction as traders assess recovering Middle Eastern supplies alongside the geopolitical outlook following the US midterm elections. Crude prices extended their recovery after Wednesday's sell-off, driven partly by the Democrats sweeping both the House and the Senate. This political shift prompted speculation that US President Donald Trump might face increased pressure to end the eight-month conflict with Iran. However, prospects for a swift resolution remain uncertain as market participants reconsider whether the election outcomes will truly lead to a quick end to the war.
Meanwhile, the USD/CAD pair remains steady as the US Dollar (USD) finds support in widespread market caution ahead of key economic data. Investors are awaiting the US Nonfarm Payrolls (NFP) report, which is expected to play a critical role in shaping market expectations for the Federal Reserve's December policy decision.
Countering that dollar support, recent declines in US bond yields and lingering hopes for diplomatic progress with Iran continue to keep the safe-haven greenback on the back foot. Additionally, the Democrats' victory has raised expectations of political gridlock in Washington, which could constrain government spending and ultimately lead to slower economic growth.
Strategists at OCBC caution against reading too much into the post-election Dollar weakness, warning that they “would be cautious about extrapolating the initial USD sell-off into a sustained decline.” They argue that while Democrats have secured control of Congress, this “does not mean unrestricted policy power,” with “major legislation” still “vulnerable to President Trump's veto.” OCBC also underscores that Democrats “lack the two-thirds majorities in both chambers needed to override it,” suggesting that the scope for transformative policy shifts remains constrained and, by extension, limiting the case for a structurally weaker USD at this stage.
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.