USD/CAD flat lines above 1.3650 as investors track US-China trade talk progress, US CPI data
- USD/CAD trades flat around 1.3670 in Wednesday’s early Asian session.
- A potential US-China trade deal could provide some support to the US Dollar.
- The BoC held the key rate steady but says a future cut is possible.
The USD/CAD pair holds steady near 1.3670 during the early Asian session on Wednesday. Easing trade tension between the United States (US) and China could underpin the US Dollar (USD). Investors will closely monitor the result of the US-China trade talks. Also, the US May Consumer Price Index (CPI) data will take center stage later on Wednesday.
US Commerce Secretary Howard Lutnick hinted at potential resolutions with China. Lutnick said late Tuesday that the US and China have reached a framework to implement the Geneva Consensus, but they will go back and see if US President Donald Trump approves it. Positive developments surrounding US-China negotiations could stabilize global markets and lift the Greenback.
The Bank of Canada (BoC) held its key benchmark rate at 2.75% last week, citing US trade policy uncertainty. However, BoC policymakers noted that another rate cut might be necessary if the economy weakened in the face of tariffs. Economists expect two or three additional reductions from the BoC this year, and the final rate by the end of the year would likely end at around 2%. This, in turn, could weigh on the Canadian Dollar (CAD) and act as a tailwind for the pair.
Meanwhile, a rise in Crude Oil prices might boost the commodity-linked Loonie. 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.
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