USD/CAD rises to near 1.3900 due to easing US-China tensions, lower Oil prices
- USD/CAD edges higher as easing tensions between the US and China support the US Dollar.
- China’s decision to exempt certain US imports from its 125% tariffs has sparked hopes for improved trade relations.
- The commodity-linked CAD remains under pressure as declining crude Oil prices further dampen sentiment.
USD/CAD is advancing for the second consecutive session, hovering around 1.3880 during Asian trading hours on Monday. The pair continues to strengthen as the US Dollar (USD) gains momentum, supported by signs of easing tensions between the US and China.
On Friday, sources reported that China exempted certain US imports from its 125% tariffs, fueling optimism that the long-standing trade dispute between the world’s two largest economies could be nearing resolution. However, Reuters cited a Chinese embassy spokesperson who firmly denied any ongoing negotiations, stating, "China and the US are not having any consultation or negotiation on tariffs," and urged Washington to "stop creating confusion."
The US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, is also posting gains for the second straight day, trading near 99.70 at the time of writing. Meanwhile, the Federal Reserve (Fed) remains in a blackout period ahead of the Federal Open Market Committee (FOMC) meeting scheduled for May 7.
Adding to the complex picture, US Agriculture Secretary Brooke Rollins mentioned on Sunday, according to Reuters, that the Trump administration is engaged in daily discussions with China regarding tariffs. Rollins highlighted that not only are talks ongoing, but trade deals with other countries are also reportedly "very close."
On the other hand, the commodity-linked Canadian Dollar (CAD) faces pressure from declining crude Oil prices. West Texas Intermediate (WTI) Oil price continues to slide as progress in US-Iran nuclear negotiations raises the possibility of Iranian crude re-entering the market. Additionally, expectations that Organization of the Petroleum Exporting Countries and its allies, known as OPEC+ could increase output for a second consecutive month have further weighed on Oil prices.
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.
BRANDED CONTENT
The right broker can enhance your trading experience by offering key features suited to your strategy. Discover a curated list of brokers designed to meet various trading preferences.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
