- USD/CAD gains traction to around 1.4340 in Wednesday’s late American session.
- Lower crude prices and renewed US tariff threats exert some selling pressure on the Canadian Dollar.
- Fed officials need a clear signal before deciding on the next moves.
The USD/CAD pair extends the rally to near 1.4340 during the late American session on Wednesday. A decline in crude oil prices continues to weigh on the commodity-linked Canadian Dollar (CAD). The US weekly Initial Jobless Claims are due later on Thursday, along with the estimate of Gross Domestic Product (GDP) for the fourth quarter (Q4).
Crude oil prices fall to a two-month low amid raising supply concerns as prospects for a peace deal between Russia and Ukraine are improving. This, in turn, undermines the commodity-linked Loonie as Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
Furthermore, the renewed US tariff threats weigh on the CAD and act as a tailwind for USD/CAD. US President Donald Trump confirmed plans to impose 25% tariffs on Canadian goods and 10% on Canadian energy exports by April 2, reversing earlier delays tied to Canada’s border security measures. "It's another month, which is obviously good news for Canada, but the tariff uncertainty is a real drag on the Canadian economy," said Adam Button, chief currency analyst at ForexLive.
The US Dollar (USD) rebounds from 11-week lows as traders assess the strength of the economy and tariff outlook. Richmond Federal Reserve (Fed) President Tom Barkin said on Tuesday that he will follow a wait-and-see approach regarding Fed interest rate policy until it is clear inflation is returning to the central bank's 2% goal given the current uncertainty surrounding the economy.
The Fed officials are scheduled to speak later in the day, including Michelle Bowman, Beth Hammack and Patrick Harker. The hawkish comment from policymakers could lift the USD against the Canadian Dollar (CAD) in the near term.
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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