Title: Canadian Dollar Under Pressure as Oil Prices Drop and US Dollar Strengthens
By Eren Sengezer, FXStreet (adapted and expanded version)
The Canadian Dollar (CAD) continues to face downward pressure amid falling crude oil prices and the renewed strength of the US Dollar (USD). As one of the key commodity currencies, the CAD is heavily influenced by the price of energy commodities, particularly crude oil, which is Canada’s largest export. The decline in oil prices, coupled with hawkish sentiment surrounding the US Federal Reserve, has created adverse conditions for the loonie.
This article explores the recent trends in the foreign exchange (Forex) market surrounding the CAD, detailing macroeconomic developments, technical analysis, and a broader view of the forces driving the USD/CAD currency pair.
Overview: What Is Weakening the Canadian Dollar?
Several factors are responsible for the recent weakening of the Canadian Dollar:
– Falling crude oil prices, due to lower demand outlooks and rising inventories
– Strengthening US Dollar on robust US economic data and hawkish Federal Reserve expectations
– Soft Canadian economic indicators casting doubt on the need for further Bank of Canada interest rate hikes
– Market sentiment shifting in favor of safer assets, favoring the greenback
Let’s dive into how each of these elements is playing a role in moving the USD/CAD currency pair and impacting the broader relationship between the two North American currencies.
Oil Prices Decline, Undermining the Loonie
Crude oil, specifically West Texas Intermediate (WTI), has declined significantly in recent sessions. Prices fell under $81 per barrel on November 3, 2024, amid rising US inventories and concerns over weakened global demand. Despite geopolitical tensions in the Middle East, which would typically bolster oil prices, fears of an economic slowdown appear to have gained the upper hand.
– According to the Energy Information Administration (EIA), US crude oil inventories increased by 0.8 million barrels in the week ending October 27, 2024.
– Oil prices have retreated roughly 8% in recent weeks due to growing concerns that global economic growth, particularly in China and Europe, may continue to slow down.
– Saudi Arabia and Russia have reiterated their voluntary supply cuts into the end of 2024, but markets are focusing more on demand than supply dynamics.
Because Canada is a major oil exporter, the performance of crude heavily impacts its currency. Lower oil prices lead to reduced revenue from oil exports, weakening the trade balance and creating downward pressure on the CAD.
US Dollar Strength Bolstered by Federal Reserve Hawkishness
The US Dollar has seen strong broad-based demand supported by resilient US economic fundamentals and expectations of prolonged higher interest rates from the Federal Reserve.
– The Federal Open Market Committee (FOMC) left the policy rate unchanged at 5.25–5.50% during its last meeting but signaled a continued hawkish stance.
– Fed Chair Jerome Powell stated that inflation remains too high and indicated that further policy tightening may still be necessary if the economy continues to show strength.
– Recent US data, including Q3 GDP growth of 4.9% (annualized) and Nonfarm Payroll additions exceeding expectations, suggest the US economy remains robust despite higher borrowing costs.
This strength in the US economy contrasts with signs of slowing growth in Canada, creating a widening divergence between the US and Canadian monetary policy outlooks. As a result, the US Dollar has become more attractive for investors, pushing the USD/CAD pair higher.
Canadian Economic Data Shows Signs of Weakness
Canada’s recent economic indicators have not signaled the need for additional rate hikes, which further contributes to the weakening Canadian Dollar.
– The Canadian economy grew by just 0.1% in Q2 2024, well below expectations. Preliminary reports suggest stagnation or contraction may have occurred in early Q3.
– The labor market has started to show signs of cooling, with the unemployment rate rising slightly to 5.8%
Read more on USD/CAD trading.