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USD/CAD stabilizes below 1.4400 as oil prices rise, US Producer Price Index data looms

  • USD/CAD is trading in negative territory near 1.4380 at the start of the European session on Tuesday.
  • Rising crude oil prices and strong Canadian jobs reports support the Canadian dollar.
  • Investors are backing off bets on Fed rate cuts in 2025.

The USD/CAD pair remains weak near 1.4380 during early European trading hours on Tuesday. Stronger-than-expected Canadian labor market data for December and rising crude oil prices are supporting the Canadian dollar (CAD) against the US dollar. Traders will take further cues from the December US Producer Price Index (PPI), which will be released later on Tuesday.

Traders are becoming a little less confident that the Bank of Canada (BoC) will continue to cut interest rates at its January meeting after data on Friday showed that the Canadian economy added more jobs than expected in December. The probability of the Bank of Canada cutting interest rates on January 29 fell to 61%, after it was 70% before the labor market data, according to Reuters.

Furthermore, higher crude oil prices amid broader US sanctions on Russian oil are strengthening the commodity-linked Canadian dollar, as Canada is the largest exporter of oil to the US.

On the U.S. front, the Bureau of Labor Statistics noted on Friday that nonfarm payrolls increased by 256,000 jobs in December, the most since March, while the unemployment rate fell to 4.1% during the same reporting period. This reading may reinforce bets that the US central bank will maintain a hawkish stance through most of the year, which could lead to a rise in the US dollar. Markets are discounting 2.7% chances of a 25 basis point cut in interest rates at the Federal Open Market Committee meeting on January 28-29, according to the CME FedWatch tool.

Frequently asked questions about the Canadian dollar

The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.

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

The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.

While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.

Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment, and consumer confidence surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.

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