USD/CAD softens below 1.4050 as US government shutdown continues
- USD/CAD declines to around 1.4040 in Friday’s Asian session.
- The Senate failed to advance a Republican bill to extend government funding and end the shutdown for a tenth time.
- Lower crude oil prices could weigh on the commodity-linked Loonie and help limit the pair’s losses.
The USD/CAD pair loses ground near 1.4040 during the Asian trading hours on Friday. The US Dollar (USD) softens against the Canadian Dollar (CAD) as global trade tensions and signs of weakening in the US economy bolster the case for further rate cuts by the Federal Reserve (Fed).
Concerns over trade tensions and the ongoing US government shutdown drag the Greenback lower against the CAD. US President Donald Trump began a trade war with China, raising concerns about long-term impacts on the economy, even as US Treasury Secretary Scott Bessent suggested a longer truce before raising tariffs further.
US federal shutdown will extend into next week as the Senate failed to advance the GOP funding bill for a tenth time. The White House said on Wednesday that it will likely lay off at least 10,000 federal workers during the US government shutdown as Trump steps up pressure on Democrats.
Additionally, the prospect of Fed rate cuts in the remainder of the day might contribute to the USD’s downside. Fed Governor Christopher Waller noted that he is on board with another interest rate cut at the Fed’s policy meeting later this month due to the mixed readings in the labor market. The Fed's newest Governor Stephen Miran reiterated support for more aggressive rate cuts at the October meetings than the one favored by some of his colleagues.
Nonetheless, a fall in crude oil prices could undermine the commodity-linked Loonie and cap the downside for the pair. It’s worth noting that Canada is the largest oil exporter to the 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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