USD/CAD extends the decline to near 1.3600 as Trump's tariff deadline looms
- USD/CAD tumbles to near 1.3605 in Wednesday’s early Asian session.
- Canadian PM said he'll only sign a US trade deal in the best interest of Canadians.
- Worries about tariff uncertainty and Fed independence weigh on the US Dollar.
The USD/CAD pair extends its downside to around 1.3605 during the early Asian session on Wednesday. The Canadian Dollar (CAD) edges higher to a two-week high against the US Dollar (USD) amid unabated uncertainty over trade policy. Investors await the preliminary reading of US S&P Global Purchasing Managers Index (PMI) reports for July, which will be released later on Thursday.
Canadian Prime Minister Mark Carney emphasized that his government will only sign a new agreement if there is one worth signing. "The Government of Canada will not accept a bad deal," said Carney on Tuesday. Additionally, Carney stated that while the Canadian government remains open to further trade talks with the US, the country will continue to pursue active negotiations with allies outside of the US.
Analysts believe the prospect of Canada reaching a trade agreement with the US by the August 1 deadline appears uncertain. This, in turn, continues to weigh on the US Dollar (USD) in the near term.
Concerns over the Federal Reserve (Fed) independence might also drag the Greenback lower as US President Donald Trump has repeatedly railed against Chair Jerome Powell and urged him to resign because of the US central bank's reluctance to cut interest rates.
On the other hand, a decline in Crude Oil prices could undermine the commodity-linked Loonie. 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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