USD/CAD trades with negative bias around mid-1.3800s; Trump’s tariff threat limit losses
- USD/CAD edges lower during the Asian session, though it lacks follow-through selling.
- Trump’s tariff threats and weaker Oil prices undermine the Loonie, supporting the pair.
- The divergent BoC-Fed policy expectations warrant caution before placing bullish bets.
The USD/CAD pair struggles to capitalize on the previous day's goodish recovery from the 1.3800 mark, or its lowest level since September 22, and edges lower during the Asian session on Tuesday. Spot prices currently trade around the 1.3845-1.3850 region, though traders seem reluctant to place aggressive directional bets amid mixed fundamental cues.
The upbeat Canadian employment details released last Friday reaffirmed the Bank of Canada's (BoC) hawkish outlook, which is seen underpinning the Canadian Dollar (CAD) and weighing on the USD/CAD pair. The upside for the CAD, however, remains capped in the wake of US President Donald Trump's threat that he could impose fresh tariffs on agricultural products, including Canadian fertilizer and Indian rice.
Adding to this, Crude Oil prices consolidate the previous day's heavy losses, which, in turn, undermines the commodity-linked Loonie and offers some support to the USD/CAD pair. Bullish traders, however, seem reluctant to place aggressive bets as rising bets for more rate cuts by the US Federal Reserve (Fed) keeps a lid on the recent US Dollar (USD) recovery from its lowest level since late October, touched last week.
Furthermore, investors opt to wait on the sidelines ahead of key central bank event risks – the BoC policy update and the highly-anticipated FOMC rate decision on Wednesday. In the meantime, Tuesday's US macro data – the ADP Weekly Employment Change and JOLTS Job Openings might provide some impetus. Nevertheless, the divergent BoC-Fed expectations warrant some caution for the USD/CAD bulls.
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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