- USD/CAD softens to around 1.4430 in Thursday’s late American session.
- US annual PPI inflation declined to 3.2% in February, softer than expected.
- Canada's Finance Minister said the country agreed to maintain dialogue.
The USD/CAD pair weakens to near 1.4430 during the late American session on Thursday, pressured by lower US yields. However, lower crude oil prices might weigh on the commodity-linked Loonie and help limit the pair’s losses. The preliminary Michigan Consumer Sentiment will take center stage on Friday.
The concerns about slowing growth in the US economy from US President Donald Trump's administration's trade policies could exert some selling pressure on the Greenback. Data released by the US Bureau of Labor Statistics on Thursday showed that the US Producer Price Index (PPI) rose 3.2% on a yearly basis in February, compared to the 3.7% increase recorded in January. This figure came in below the market expectation of 3.3%.
Meanwhile, the annual core PPI rose 3.4% in February versus 3.8% in January. On a monthly basis, the PPI was unchanged, while the core PPI declined by 0.1%.
Canada's Finance Minister Dominic LeBlanc said on Friday tariffs are harmful to both the United States and Canada, adding that moving forward with dialogue is crucial. Traders will closely monitor the developments surrounding Trump’s tariff policy. Any signs of an escalating trade war could undermine the Canadian Dollar (CAD) against the USD.
On Wednesday, the Bank of Canada (BoC) cut its benchmark interest rate by 25 basis points (bps), bringing it down to 2.75%. This was the BoC’s seventh consecutive interest rate cut. A move that comes just hours after US President Donald Trump issued new steel and aluminum tariffs against Canada.
BoC governor Tiff Macklem said during the press conference that the central bank would "proceed carefully with any further changes," needing to assess both the upward pressures on inflation from higher costs in a trade war and the downward pressures from weaker demand.
Meanwhile, a decline in crude oil prices on the back of steady tariff concerns could weigh on the commodity-linked Canadian Dollar (CAD). It’s worth noting that 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.
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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