USD/CAD consolidates above 1.3900; weaker Oil prices and dovish BoC lend support

The USD/CAD pair extends its sideways consolidative price move for the second straight day and trades above the 1.3900 mark during the Asian session on Wednesday. Meanwhile, the fundamental backdrop seems tilted in favor of bulls and suggests that the path of least resistance for spot prices is to the upside.

Crude Oil prices struggle to attract any meaningful buyers and remain close to a multi-month trough set in September amid the prospect for a larger output hike by OPEC+ next month. Apart from this, expectations for additional interest rate cuts by the Bank of Canada (BoC) contribute to the Canadian Dollar's (CAD) relative underperformance and continue to act as a tailwind for the USD/CAD pair.

BoC Governor Tiff Macklem said last Tuesday that the central bank will support economic growth while ensuring inflation remains well controlled. Meanwhile, traders have been pricing in the possibility that the US Federal Reserve (Fed) would lower borrowing costs twice this year. This, along with the looming US government shutdown, keeps the US Dollar (USD) depressed and caps the USD/CAD pair.

Moving ahead, market participants now look forward to the release of the US ADP report on private-sector employment and the US ISM Manufacturing PMI, which would drive the USD demand later during the North American session. Apart from this, Oil price dynamics could influence the commodity-linked Loonie and produce short-term trading opportunities around the USD/CAD pair.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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