USD/CAD weakens below 1.4400 on upbeat Canadian PMI, higher crude oil prices
- USD/CAD trades in negative territory around 1.4395 in Friday’s Asian session.
- The upbeat Canadian PMI and rising crude oil prices support the Loonie.
- A slow and cautious approach of the Fed might help limit the pair’s losses.
The USD/CAD pair softens to near 1.4395 on Friday during the Asian trading hours. The rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD) against the Greenback.
Data released by S&P Global on Thursday revealed that the Canadian Manufacturing PMI rose to 52.2 in December from 52.0 in November, its highest level since February 2023. This reading was better than the estimation of 51.9.
Meanwhile, higher crude oil prices contribute to the CAD’s upside. It's worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.
However, the potential threat of US tariffs and domestic political uncertainty might drag the Loonie lower and act as a tailwind for USD/CAD. President-elect Donald Trump said in December that he planned to impose 25% tariffs against Canada and Mexico unless the countries reduce the flow of migrants and fentanyl into the United States.
The Federal Reserve (Fed) lowered the target federal funds rate by 25 basis points (bps) from 4.50%-4.75% to 4.25%-4.50% in the December meeting. Nonetheless, the signal of slower Fed rate cuts this year might lift the Greenback in the near term. In the final monetary policy meeting on December 18, Fed officials pencilled in only two rate cuts in 2025, down from the four it had forecast in September.
Traders will take more cues from the slew of US economic data that will give a clear picture of the US economy and a certain conviction about the US Fed rate cut this year. The US Manufacturing Purchasing Managers Index (PMI) for December will be the highlight later on Friday.
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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