- USD/CAD holds ground near its two-month high of 1.3868, reached on Thursday.
- The US Dollar receives support due to rising bets of a potential second term for former President Donald Trump.
- The weakening of the commodity-linked CAD is bolstered by lower Oil prices.
The USD/CAD pair maintains its position on two consecutive days of gains, trading around 1.3850 during the Asian session on Friday. This level is near its two-month peak of 1.3868, reached on Thursday. The pair's strength can be linked to the robust performance of the US Dollar (USD), driven by rising expectations that the Federal Reserve will take a less aggressive approach to interest rate cuts than previously thought.
Additionally, the Greenback is bolstered by increasing speculation regarding a potential second term for former President Donald Trump in the upcoming US presidential election in November, particularly due to inflationary policies that include higher tariffs and lower taxes.
On Thursday, Republican nominee Donald Trump returned to his familiar reality show catchphrase during an event in Las Vegas, Nevada. Trump stated, "Under the Trump administration, we're going to build an economy that lifts up all Americans, including African Americans, Hispanic Americans, and also members of our great Asian American and Pacific Islander community, many of whom are here today," as reported by Reuters.
Meanwhile, Vice President Kamala Harris enjoyed the backing of rock legend Bruce Springsteen, entertainer Tyler Perry, and former President Barack Obama at a rally in Georgia, which attracted thousands of supporters in this key battleground state.
The commodity-linked Canadian Dollar (CAD) may continue to weaken amid declining crude Oil prices, as Canada is the largest oil exporter to the United States (US). As of now, West Texas Intermediate (WTI) Oil price is experiencing its third consecutive day of losses, trading around $70.20 per barrel.
Traders are likely to focus on Canada’s Retail Sales data set to be released later in the North American session. Additionally, Bank of Canada (BoC) Governor Tiff Macklem is scheduled to speak with journalists both in-person and virtually during the IMF 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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