USD/CAD rises toward 1.3700 as US Dollar trims earlier weakness
- USD/CAD rebounds on Thursday as the US Dollar trims intraday losses.
- Fed policy expectations and steady US labor data underpin the Greenback.
- Canada’s Current Account deficit narrows sharply ahead of key Q4 GDP data.
The Canadian Dollar (CAD) pares earlier gains against the US Dollar (USD) on Thursday as the Greenback shrugs off its intraday weakness. At the time of writing, USD/CAD trades at 1.3704, rebounding from the daily low around 1.3650.
The Greenback finds support as traders reassess the Federal Reserve’s (Fed) monetary policy path, with markets trimming expectations for near-term rate cuts amid persistent inflation pressure.
Policymakers also noted in the minutes of the January FOMC meeting, released earlier this month, that several participants said it would likely be appropriate to keep interest rates steady for some time while assessing incoming data. At the same time, officials left the door open to rate hikes if inflation fails to move sustainably toward the Fed’s 2% target.
Markets now widely expect the Fed to keep interest rates unchanged at its March and April meetings, while scaling back expectations for a rate cut in June.
On the data front, weekly US jobless claims showed the labor market remains steady. Initial Claims came in at 212K, slightly below the 215K forecast and up modestly from the prior week’s 208K.
Continuing Jobless Claims declined to 1.833 million, improving from 1.864 million previously and coming in below expectations of 1.86 million. Meanwhile, the four-week average of Initial Claims edged up to 220.25K from 219.5K.
The data provided modest support to the Greenback. The US Dollar Index (DXY), which tracks the currency against a basket of six major peers, is trading near 97.78, recovering from an intraday low of 97.49.
Canada’s Current Account deficit narrowed to CAD -0.7 billion in the fourth quarter, improving from the revised CAD -5.27 billion previously, which was earlier reported at CAD -9.68 billion.
Attention now turns to Friday’s Gross Domestic Product (GDP) data, where the economy is forecast to show flat growth in Q4 on an annualized basis, compared with the 2.6% expansion recorded in the third quarter.
Elsewhere, subdued Oil prices are also weighing on the Loonie. Crude markets remain volatile amid rising Middle East tensions, with investors closely watching the outcome of the third round of US-Iran nuclear talks currently underway in Geneva.
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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