Canadian Dollar gains despite lower oil prices

USD/CAD may gain amid rising odds of a December Fed rate hike following strong jobs data.
Traders await upcoming US CPI and PPI reports for further central bank policy signals.
Tumbling crude oil prices continue to weigh on the commodity-linked Canadian dollar.

USD/CAD loses ground after two days of gains, trading around 1.4110 during Asian hours on Monday. However, downside momentum could be restrained as the US Dollar (USD) may regain ground. This potential strength is driven by rising odds of a December Federal Reserve rate hike after strong US labor data. Investors are now closely watching Tuesday's US Consumer Price Index (CPI) report and Friday's Producer Price Index (PPI) for further signals regarding the Fed's upcoming policy decisions.

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According to the CME FedWatch tool, the probability of another 25-basis-point rate hike at the December Federal Open Market Committee (FOMC) meeting has climbed above 78%. Robust US employment figures are providing significant support for the Greenback. Specifically, Nonfarm Payrolls (NFP) increased by 165,000 in October—easily topping the market consensus of 65,000 and building on September's revised total of 60,000—while the Unemployment Rate edged down to 4.1%, beating expectations of 4.2%.

Additionally, the USD/CAD pair could find support as the commodity-linked Canadian Dollar (CAD) faces downward pressure from falling oil prices. Crude prices dropped after US President Donald Trump stated that further military strikes on Iran are "highly unlikely," provided progress continues on Iran's nuclear program and the Strait of Hormuz remains open. Trump also noted that the unpopular Middle East conflict, which pushed up energy costs, contributed to the Republicans' recent midterm election losses.

In a phone interview with CNN reported by Reuters, Trump reaffirmed that additional military action would likely be unnecessary if Iran signs a firm agreement. Despite earlier hints at resuming major attacks after the midterms, no large-scale US military operations have been launched. Meanwhile, Iran has warned that it will retaliate against any future strikes by targeting US and Israeli assets.

Technical Analysis:

In the daily chart, USD/CAD trades at 1.4110. The pair holds above both the 50- and nine-day Exponential Moving Averages (EMAs), which suggests a constructive near-term bias as price extends its recovery off the recent lows. The 14-day Relative Strength Index (RSI) at 55.3 has eased back from prior overbought extremes but remains in neutral-to-positive territory, hinting that bullish momentum is still present without being stretched.

On the downside, initial support is located at the 50-day EMA at 1.4054, followed closely by the nine-day EMA at 1.4047, forming a tight demand cluster that underpins the short-term trend as long as it holds. With no clear resistance levels in the provided dataset, traders would likely monitor psychological and recent swing highs above 1.4111 for signs of fatigue, while a daily close back below the EMA cluster would undermine the bullish bias and signal a deeper corrective phase.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

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