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USD/CAD remains below 1.3500 due to higher oil prices

  • The USD/CAD continues its losing streak due to higher oil prices amid increasing geopolitical tensions.
  • The WTI price is rising due to growing fears of a broader Middle East conflict and the possible closure of Libyan oil fields.
  • The US dollar lost ground due to the increasing likelihood of a Fed rate cut in September.

USD/CAD is losing ground for the third consecutive session and is trading around 1.3480 on Tuesday early European morning. This downward trend in the USD/CAD pair could be attributed to the rising commodity price of the Canadian dollar (CAD).

Crude oil prices have risen sharply on concerns about potential supply disruptions, sparked by fears of an escalating conflict in the Middle East and a possible closure of Libyan oil fields. At the same time, Hamas has rejected Israel's new terms in the ongoing ceasefire talks in Egypt and insisted that Israel adhere to the conditions set by US President Joe Biden and the UN Security Council.

However, US Air Force Chairman of the Joint Chiefs of Staff Gen. CQ Brown told Reuters early Tuesday that concerns about a looming major conflict in the region had diminished, and an exchange of fire between Israel and Lebanon's Hezbollah had not escalated further.

Oil prices were supported by growing expectations of interest rate cuts in the US, which could boost fuel demand. Lower borrowing costs are expected to boost economic activity in the US, the world's largest oil-consuming country.

Federal Reserve Chairman Jerome Powell said on Friday at the Jackson Hole Symposium: “It is time to adjust policy.” However, Powell did not specify when the rate cuts would begin or how large they might be. According to the CME FedWatch tool, markets expect the Federal Reserve to cut interest rates by at least 25 basis points at its September meeting.

Frequently asked questions about the Canadian dollar

The main factors that affect the Canadian dollar (CAD) are the Bank of Canada (BoC) interest rate level, the price of oil, Canada's largest export commodity, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are looking to take on riskier assets (risk-taking) or seek safe havens (risk-averse) – with risk-taking being positive for the CAD. As the largest trading partner, the health of the US economy is also a major factor that affects the Canadian dollar.

The Bank of Canada (BoC) has a significant influence on the Canadian dollar by setting the level of interest rates at which banks can lend money to each other. This affects the level of interest rates for everyone. The BoC's main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to have a positive effect on the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former negatively affecting the CAD and the latter positively affecting the CAD.

The price of oil is a major factor that affects the value of the Canadian dollar. Petroleum is Canada's largest export commodity, so the price of oil usually has a direct impact on the value of the CAD. When the price of oil rises, the CAD generally rises as well, as overall demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to lead to a greater likelihood of a positive trade balance, which also supports the CAD.

While inflation has traditionally always been seen as a negative factor for a currency as it reduces the value of money, in modern times with the loosening of cross-border capital controls, the opposite is actually true. Higher inflation tends to cause central banks to raise interest rates, which leads to more capital inflows from global investors looking for a lucrative investment opportunity for their money. This increases the demand for the local currency, in the case of Canada, that is the Canadian dollar.

The release of macroeconomic data is an indicator of the health of the economy and can impact the Canadian dollar. Indicators such as GDP, manufacturing and services purchasing managers' indices, 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 can also encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is weak, the CAD is likely to fall.

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