- USD/CAD appreciates as the DXY advances toward 106.50, driven by rising US yields.
- Richmond Fed President Barkin emphasized the need for a cautious "wait and see" approach amid persistent policy uncertainties.
- The commodity-linked CAD faces headwinds due to falling crude Oil prices.
USD/CAD continues its upward momentum for the fourth straight session, trading around 1.4330 during Asian hours on Wednesday. The US Dollar (USD) strengthens amid rising US Treasury yields. The US Dollar Index (DXY), which tracks the USD against six major currencies, climbs near 106.50, with 2-year and 10-year US Treasury yields rising to 4.13% and 4.33%, respectively, at the time of writing.
On Tuesday, Thomas Barkin, President of the Federal Reserve Bank of Richmond, forecasted another decline in Personal Consumption Expenditure (PCE) inflation later this week, noting the Fed’s significant progress in managing inflation. Despite his generally positive outlook, Barkin stressed the importance of a cautious "wait and see" approach due to ongoing policy uncertainties.
The Canadian Dollar (CAD) remains under pressure following US President Donald Trump’s confirmation that tariffs on Canadian and Mexican imports will proceed as planned, despite both nations' efforts to enhance border security and combat fentanyl trafficking ahead of the March 4 deadline. Trump further claimed that the US does not need Canadian crude Oil or lumber, contradicting a long history of trade between the two countries.
Additionally, falling crude Oil prices weaken the commodity-linked CAD, given Canada’s status as the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price declines to around $69.00 per barrel at the time of writing. Crude Oil prices face downward pressure due to US economic concerns and broader market uncertainty impacting the energy demand outlook. President Trump’s foreign policies further contribute to this pressure, with potential peace talks between Russia and Ukraine raising expectations of lifted Russian sanctions and increased Russian Oil exports.
Canadian Dollar FAQs
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.
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.
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.
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.
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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