USD/CAD holds ground around 1.3650 due to lower Oil prices, hawkish Fed

• The commodity-linked CAD struggles as Crude Oil price continues its losing streak for the fourth successive day.

• WTI price extends its losses due to the diminished impact of Hurricane Beryl.

• Fed Chair Powell stated, "First-quarter data did not support the greater confidence in the inflation path."

USD/CAD holds its gains, trading around 1.3640 during the early European hours on Wednesday. The weakening of the commodity-linked Canadian Dollar (CAD) could be attributed to lower crude Oil prices, given the fact that Canada is the biggest Oil exporter to the United States (US).

West Texas Intermediate (WTI) Oil price trades around $80.30 per barrel at the time of writing. This drop in Oil prices is attributed to the diminished impact of Hurricane Beryl. The storm affected a major Oil-producing region in Texas but caused less damage than initially expected by the markets.

Oil and gas companies resumed some operations on Tuesday. Several ports reopened, and most producers and facilities began ramping up output. However, some facilities sustained damage, and power had not yet been fully restored, according to Reuters.

Additionally, Oil prices may face challenges due to weak consumer demand in China, the world's top crude importer. China's Consumer Price Index (CPI) data showed an annual increase of 0.2% in June, down from a 0.3% rise in May, falling short of the market's forecast of a 0.4% increase. Monthly, inflation declined by 0.2% in June, compared to the previous and expected decline of 0.1%.

Moreover, Federal Reserve Chairman Jerome Powell's testimony before the US Congress on Tuesday. Powell acknowledged improving inflation data but reiterated the Fed's cautious stance. The higher rate would negatively impact the economy of the United States, the largest Oil consumer.

Fed Chair Powell stated, "More good data would strengthen our confidence in inflation." He also noted that "first-quarter data did not support the greater confidence in the inflation path that the Fed needs to cut rates."

Traders anticipate the second semi-annual testimony by Fed Chair Jerome Powell and speeches by the Fed’s Michelle Bowman and Austan Goolsbee on Wednesday. Additionally, attention will be on the US Consumer Price Index (CPI) data, set to be released on Thursday.

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.