AUD/CAD remains in positive territory after paring daily losses, trading around 0.9520 during European hours on Friday. However, the upside from this currency swap may be constrained as the commodity-pegged Canadian dollar (CAD) receives support from higher oil prices. Traders will be watching data from the Canadian labor market and the Ivey Purchasing Managers’ Index (PMI) for January, which will be released later in the North American session.
West Texas Intermediate (WTI) Crude oil is trading higher after posting tiny losses in the previous session, and is trading around $64.00 per barrel at the time of writing. However, the WTI price is on track for a weekly decline after six consecutive weeks of gains, largely fueled by expectations for the United States (US)-Iran meeting scheduled later in the day.
Any significant progress in U.S.-Iran talks could ease near-term fears of military escalation and potential supply disruptions involving major OPEC producer, which accounts for about a third of global oil production.
The AUD/CAD cross also came under pressure as the Australian dollar (AUD) weakened amid widespread sell-offs in global equities and other risk-sensitive assets. Commodity-linked AUD, often seen as a floating gauge reflecting global risk sentiment, has been hit by a tech-led share sell-off amid concerns about gigantic AI-related spending, which has shaken investor confidence.
However, the AUD later regained some advantage over its main competitors following comments from Reserve Bank of Australia (RBA) Governor Michele Bullock, who stated that the board had raised the official cash rate (OCR) because the economy was more constrained than previously assessed, requiring a more stringent policy stance. Bullock added that the RBA must limit demand growth unless supply capacity grows faster.
Canadian Dollar FAQs
The key factors shaping the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of crude oil, which is Canada’s largest export, the condition of its economy, inflation and the trade balance, i.e. the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are taking on riskier assets (with risk) or looking for sheltered havens (with risk), with risk being positive relative to CAD. As the United States’ largest trading partner, the health of the U.S. economy is also a key factor influencing the exchange rate of the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The main goal of the BoC is to keep inflation at 1-3% by raising or lowering interest rates. Relatively higher interest rates tend to benefit CAD. The Bank of Canada may also operate quantitative easing and tightening to influence lending terms, with the former being CAD negative and the latter CAD positive.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil usually has a direct impact on the value of CAD. Generally speaking, if the price of oil increases, CAD also increases because aggregate demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which also supports CAD.
While inflation has always traditionally been considered a negative factor for currency because it reduces the value of money, in current times the opposite has been true with the relaxation of cross-border capital controls. Higher inflation prompts central banks to raise interest rates, which attracts more capital inflows from global investors looking for 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 are used to assess the condition of the economy and may affect the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of CAD. A forceful economy is good for the Canadian dollar. Not only will it attract more foreign investment, but it could encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is delicate, CAD will likely decline.
