USD/CAD holds above 1.3850 due to lower Oil prices, US NFP eyed
- USD/CAD remains stronger as traders adopt caution ahead of the US Nonfarm Payrolls report.
- The commodity-linked Canadian Dollar weakens as Oil prices decline.
- Oil prices weaken as Chevron, Vitol, and Trafigura vie for US deals to export Venezuelan crude.
USD/CAD continues its winning streak that began on January 2, trading around 1.3870 during the Asian hours on Friday. Traders await the US Nonfarm Payrolls (NFP) report, which is expected to offer further insight into labor market conditions and the Federal Reserve’s (Fed) policy outlook. On Canada’s front, Net Change in Employment and Unemployment Rate for December will also be eyed.
The USD/CAD pair also remains stronger as the commodity-linked Canadian Dollar (CAD) struggles amid lower Oil prices. The potential for rising Venezuelan Oil supply to the United States (US) could reduce demand for Canadian heavy crude. Greater competition may pressure Canadian export volumes and price differentials, weighing on energy revenues. As Oil remains a key driver of Canada’s terms of trade, weaker crude demand could limit Canadian Dollar strength against the US Dollar (USD).
Oil major Chevron, global trading houses Vitol and Trafigura, and other firms are competing for United States (US) government deals to export Venezuelan crude, vying to market up to 50 million barrels of PDVSA’s accumulated inventories amid ongoing negotiations on Venezuelan Oil exports, per Reuters.
US Treasury Secretary Scott Bessent said in a CNBC interview on Thursday that the Federal Reserve should continue cutting rates, arguing that lower rates are “the only ingredient missing” for even stronger economic growth and that the Fed should not delay. According to the CME Group's FedWatch tool, Fed funds futures continue to price in about an 86.2% probability that the US central bank will keep rates unchanged at its January 27–28 meeting.
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.
Nothing in this material constitutes investment advice, personal recommendation, investment research, an offer, or a solicitation to buy or sell any financial instrument. The content has been prepared without consideration of your individual investment objectives, financial situation, or needs, and should not be treated as such.
Past performance is not a reliable indicator of future performance and/or results. Forward-looking scenarios or forecasts are not a guarantee of future performance. Actual results may differ materially from those anticipated.
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