Canadian Dollar nears 18-month lows as risk aversion buoys the US Dollar
- USD/CAD extends gains for the second day in a row and nears 18-month highs at 1.4293.
- Risk aversion amid the ongoing global bond selloff is offsetting the positive impact on the CAD from higher Oil prices.
- Canadian data has been mixed this week, with foreign trade beating expectations and business activity slowing down.
The Canadian Dollar (CAD) posts marginal losses on Thursday with the safe-haven US Dollar (USD) favoured by the risk-averse mood, as tensions in the Middle East boost Crude prices and the global bond selloff extends. The USD/CAD pair trades at 1.4260 at the time of writing, after bouncing from lows near 1.4200, drawing closer to the 18-month high of 1.4293.
The rally in Oil prices has failed to provide any significant support to the commodity-sensitive Loonie. Higher Crude prices are boosting expectations that central banks will be forced to adopt restrictive monetary policies to tame inflation, which is deepening the global bonds’ rout.
Brent Crude appreciates around 3.50% so far on the day, trading at three-week highs above $103.00. Fresh attacks from the Houthi militias on Saudi Arabian airports have increased fears of escalating hostilities that might lead to new strikes on Saudi Oil infrastructure.
Fed minutes fail to move the needle for the US Dollar
In the US, on Wednesday, the minutes of September's Federal Reserve (Fed) monetary policy meeting confirmed that inflation remains the main concern among committee members. The impact on the US Dollar, however, was minimal as the meeting predates the soft US inflation and employment reports seen last week and, therefore, it does not change the overall view that the bank will stand pat on rates at the October meeting.
In Canada, data released earlier this week has been mixed. The Ivey Purchasing Managers Index (PMI) showed a slowdown to 58.2 in September, from 64.3 in August, and against the market consensus of a further expansion to 65.2.
On the positive side, the international trade surplus widened to CAD 4.2 billion in August from CAD 790 million in July, well beyond market expectations of a CAD 1.7 billion surplus. These figures have eased concerns about the negative impact of the trade war with the US and provided an immediate boost to the CAD, which later reversed.
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.