- USD/CAD weakens to around 1.4310 in Tuesday’s early European session.
- Justin Trudeau announced his resignation as Canada’s Prime Minister, supporting the Loonie.
- Hawkish Fed expectations might help limit the pair’s losses.
The USD/CAD pair edges lower to near 1.4310 during the early European session on Tuesday. The Canadian Dollar (CAD) strengthens against the Greenback after a report that Canadian Prime Minister Justin Trudeau would resign.
On Monday, Reuters reported that Justin Trudeau would announce his plans to step down but said it expected it would happen before an emergency meeting of Liberal legislators on Wednesday. "News that Justin Trudeau will resign is helping to underpin loonie gains," said Nick Rees, senior FX market analyst at Monex Europe Ltd.
The Globe and Mail, a Canadian media outlet, stated on Tuesday that the federal government is weighing the early release of a proposed list of American goods that would be targeted by retaliatory Canadian tariffs if the incoming US President Donald Trump imposes a 25% tax on all products from Canada.
Investors will monitor how aggressive Trump's tariff policies could be when he takes office. Meanwhile, the US Federal Reserve (Fed) is more likely to keep interest rates steady in the next meeting, which might support the Greenback. According to the CME FedWatch tool, markets are pricing in just 7.5% odds of a 25 basis points (bps) rate cut at the January Fed meeting.
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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