The Canadian dollar firmed against the U.S. dollar on Tuesday as the greenback eased from an 18-month peak, supported by declines in U.S. Treasury yields and crude oil prices.
Market data showed the U.S. dollar/Canadian dollar pair declined 0.16% to C$1.4258. The pair opened the session at C$1.4280 and traded between C$1.4256 and C$1.4283, leaving the loonie on course for a modest advance in early trading.
Traders cited a broader retreat in the U.S. dollar alongside lower Treasury yields and falling crude prices as factors that helped temper inflation worries and the outlook for higher interest rates. Investors were also parsing signs that geopolitical tensions might ease, which contributed to the softer U.S. dollar tone.
Attention in markets was focused on U.S. inflation data due on Wednesday, which participants expect will offer fresh clues about the Federal Reserve's next policy steps. Market metrics showed traders had lifted the probability that the Fed will hold rates steady at its October meeting to 80%, up from 51% a month earlier, according to CME FedWatch data.
Oil remains a key variable for the Canadian dollar because Canada is a major energy exporter. The relationship runs both ways: a weaker U.S. dollar can provide support for the loonie, but falling crude prices can blunt that support by reducing the outlook for export revenues. Lower crude therefore has the potential to weigh on the Canadian currency even as the greenback softens.
Investors said they will be watching developments in oil markets this week, alongside U.S. inflation readings and shifts in interest-rate expectations, for indications of the currency's near-term path. The interplay between commodity prices and the relative monetary-policy outlook in Canada versus the United States is likely to determine USD/CAD moves in the coming sessions.
Key points
- USD/CAD fell 0.16% to C$1.4258, opening at C$1.4280 and trading between C$1.4256 and C$1.4283.
- Softer U.S. Treasury yields and weaker crude prices contributed to the U.S. dollar's retreat from an 18-month high.
- Markets are focused on U.S. inflation data and shifting interest-rate expectations, with the probability of a Fed rate hold in October rising to 80% from 51% a month earlier.
Risks and uncertainties
- Oil-price volatility could erode the Canadian dollar's gains by reducing expected export revenues for Canada - impacting the energy sector and FX markets.
- U.S. inflation results could alter Fed policy expectations and quickly change rate-sensitive market dynamics - affecting bond markets and currencies.
- Shifts in geopolitical tensions remain a near-term uncertainty that could influence safe-haven flows and currency valuations - impacting global FX and commodity-linked currencies.