The Canadian dollar (CAD) remains the leader against the U.S. dollar (USD) on Monday as a weaker dollar and higher oil prices continue to support the Loonie Index. At the time of writing, USD/CAD is trading around 1.3568, the lowest level since January 31, down more than 0.50% on the day.
The dollar remains under pressure as US President Donald Trump’s unpredictable trade policies, repeated attacks on the independence of the Federal Reserve (Fed) and growing concerns about the US fiscal outlook weigh on confidence in the credibility of US policy.
China has urged domestic banks to limit exposure to U.S. Treasuries due to market risk concerns amid concerns about concentration risk and increased volatility, Bloomberg News reported on Monday, according to people familiar with the matter. The recommendation does not apply to the Chinese government’s sovereign holdings of U.S. Treasuries.
The US dollar index (DXY), which compares the dollar against a basket of six major currencies, is trading around 96.89, extending its decline for a second straight day.
Meanwhile, persistent expectations for further Fed easing are increasing downward pressure on the US dollar, with markets currently pricing in around two rate cuts this year.
This easing of attitudes was reinforced by weaker data from the US labor market published last week. The JOLTS survey showed job postings fell to 6.542 million in December, well below the market forecast of 7.2 million and down from 6.928 million earlier, marking the lowest level since 2020.
At the same time, ADP’s private sector payrolls rose by just 22,000 in January, below expectations of 48,000 and slowing from 37,000 the previous month.
Attention now turns to the key US macroeconomic releases this week, with the main focus being the delayed non-farm payrolls (NFP) report and the Consumer Price Index (CPI). Upcoming data is likely to play a key role in shaping the near-term direction of the U.S. dollar as investors assess the timing of the first interest rate cut this year.
According to the CME FedWatch Tool, markets currently see a 51% chance of a first rate cut in July.
In Canada, last week’s mixed employment data, with weaker employment but a lower unemployment rate, supports the argument that the Bank of Canada (BoC) should keep interest rates on hold for longer.
Against this backdrop, the growing divergence between the Fed’s monetary easing expectations and the BoC’s more cautious forecasts keeps the short-term bias on the USD/CAD pair in a bearish direction.
Oil prices also support commodity-linked Loonie as Canada is a major oil exporter. West Texas Intermediate (WTI) crude is trading near $64.00 per barrel, up about 1% on the day.
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 unthreatening 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 employ 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 robust 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 tender, CAD will likely decline.
