- USD/CAD declines as the US Dollar faces pressure from investor concerns, leading to a shift away from US assets.
- The Greenback encounters further challenges due to escalating trade tensions between the US and China.
- The commodity-linked CAD may struggle as crude Oil prices remain subdued.
USD/CAD continues its losing streak for the fourth straight session, hovering around 1.3860 during Monday's Asian trading hours. The decline is driven by a weakening US Dollar (USD), pressured by investor concerns over a potential recession and persistent inflation, prompting a shift away from United States’ (US) assets.
The Greenback also faces additional headwinds from rising trade tensions between the US and China, which have reignited fears of a global economic slowdown. On Friday, China’s Ministry of Finance announced a steep increase in tariffs on US goods, raising duties from 84% to 125%. This move followed President Trump’s earlier decision to hike tariffs on Chinese imports to 145%.
Economic data released late last week added to the cautious mood. The University of Michigan’s consumer sentiment index dropped to 50.8 in April, while one-year inflation expectations surged to 6.7%. Meanwhile, the US Producer Price Index (PPI) rose 2.7% year-over-year in March, easing from 3.2% in February, with core inflation cooling to 3.3%. Initial jobless claims edged higher to 223,000, although continuing claims fell to 1.85 million, painting a mixed picture of the labor market.
Speaking on CBS' Face the Nation on Sunday, Minneapolis Fed President Neel Kashkari commented on the trade dispute's impact: “This is the biggest hit to confidence that I can recall in the 10 years I’ve been at the Fed—except for March 2020 when COVID first hit.” Kashkari emphasized that the economic fallout would largely depend on how swiftly trade tensions are resolved.
Although President Trump’s announcement of a 90-day truce offered a glimmer of hope for renewed negotiations, broader concerns about the US economic outlook have prompted capital flows toward Canada, strengthening the Canadian Dollar (CAD).
However, the commodity-linked CAD may face some headwinds as Oil prices remain subdued, given that Canada is the largest Oil exporter to the US. West Texas Intermediate (WTI) crude Oil is trading lower at around $60.70 per barrel amid worries that escalating US-China trade tensions could hamper global growth and reduce fuel demand.
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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