USD/CAD depreciates after holding ground in the previous session, trading around 1.3660 during the Asian hours on Friday. The pair loses ground as the Canadian Dollar (CAD) receives support from improved Oil prices, given Canada’s status as the largest crude exporter to the United States (US).
West Texas Intermediate (WTI) Oil price trades around $65.60 per barrel during the early European hours on Friday after recovering from daily losses. Crude Oil prices fluctuated amid heightened tensions surrounding nuclear talks between the United States and Iran.
Crude prices may further decline as Washington and Tehran agreed to continue talks next week, easing immediate supply concerns. Iranian Foreign Minister Abbas Araqchi described Thursday’s discussions as the most substantive yet, noting that Iran clearly outlined its demands for sanctions relief and the framework for lifting restrictions.
However, geopolitical tensions remain persistent after Iran said it would not allow enriched uranium to leave the country. A sizeable US military presence in the Middle East has kept markets cautious, with President Donald Trump warning of possible military action if no agreement is reached.
The USD/CAD pair weakens as the US Dollar (USD) loses ground due to uncertainty over US trade policy. US President Donald Trump announced plans to impose a blanket 15% tariff on imports after a Supreme Court ruling struck down his earlier reciprocal tariff regime. Meanwhile, US Trade Representative Jamieson Greer said tariffs could be raised to 15% or higher for several countries in the coming days.
Traders now look to the US Producer Price Index (PPI) data for January release for guidance on Federal Reserve (Fed) policy later in the day. The report is forecast to show wholesale inflation slowing to 0.3% month-on-month, down from 0.5% in December.
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.
Source: https://www.fxstreet.com/news/usd-cad-slips-to-near-13650-as-oil-recovers-recent-losses-202602270645
