- USD/CAD remains steady as the US Dollar faces challenges due to improved market sentiment.
- US Initial Jobless Claims increased to 219,000 in the previous week, surpassing the expected 215,000.
- The Bank of Canada may rethink to cut rates amid elevated inflation in Canada.
USD/CAD moves little after registering losses in the previous session, trading around 1.4170 during the Asian hours on Friday. The pair lost ground as the US Dollar (USD) struggled amid weak jobless claims data and mixed signals from the Federal Reserve (Fed). Traders will keep an eye on the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) for February, which is due later on Friday.
US Initial Jobless Claims for the week ending February 14 increased to 219,000, surpassing the expected 215,000. Continuing Jobless Claims also rose slightly to 1.869 million, just under the forecast of 1.87 million.
Fed Governor Adriana Kugler noted on Thursday that US inflation still has "some way to go" before reaching the 2% target, acknowledging uncertainty ahead, according to Reuters. Meanwhile, St. Louis Fed President Alberto Musalem highlighted the potential risks of stagflation and rising inflation expectations.
The US Dollar Index (DXY), which measures the USD against six major currencies, gained ground near 106.50 at the time of writing. However, the DXY faced challenges amid improved market sentiment after US President Donald Trump announced potential progress in trade negotiations with China, easing market concerns over tariffs.
However, US President Donald Trump announced plans to impose import tariffs on lumber and forest products next month, which could weigh on the Canadian Dollar (CAD) as Canada remains a leading global producer and exporter.
Meanwhile, the Bank of Canada (BoC) may rethink cutting rates following the release of January’s CPI data, which showed elevated inflation in Canada. Traders will be closely watching Friday’s Canadian Retail Sales report and a speech by BoC Governor Tiff Macklem for further policy signals.
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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