USD/CAD strengthens above 1.3800 ahead of US GDP release
- USD/CAD drifts higher to around 1.3835 in Thursday's early Asian session.
- Fed is well positioned to wait for more clarity on inflation and the economy, according to the FOMC Minutes.
- Higher Crude Oil prices might cap the upside for the pair.
The USD/CAD pair edges higher to near 1.3835 during the early Asian session on Thursday, bolstered by a stronger US Dollar (USD). The second estimate of the US Q1 Gross Domestic Product (GDP) Growth Rate will take center stage later in the day, followed by the weekly Initial Jobless Claims and Pending Home Sales.
Minutes from the Federal Open Market Committee's (FOMC) latest policy meeting showed on Wednesday that Federal Reserve (Fed) officials broadly agreed that heightened economic uncertainty justified their patient approach to interest-rate adjustments. Fed officials highlighted the need to keep interest rates on hold for some time, as policy shifts in the US cloud the economic outlook.
The upbeat US economic data released earlier this week also boosted the Greenback. The US Conference Board Consumer Confidence Index climbed to 98.0 in May from 86.0 in April (revised from 85.7).
Traders will also keep an eye on the Canadian GDP data on Friday for fresh impetus. The Canadian GDP is expected to grow at an annualized rate of 1.7% in the first quarter. This figure could guide expectations for the Bank of Canada (BoC) policy decision.
Meanwhile, a rise in Crude Oil prices might underpin the commodity-linked Loonie and cap the upside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive 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.
Recommended Articles
