USD/CAD remains weak near 1.3950 ahead of Canadian CPI release
- USD/CAD weakens to around 1.3950 in Tuesday’s early Asian session.
- Moody’s downgrades the US credit rating to ‘AA1’, weighing on the US Dollar.
- A dovish turn from the BoC has fueled speculation of a June rate cut.
The USD/CAD pair softens to near 1.3950 during the early Asian session on Tuesday. The Greenback edges lower against the Canadian Dollar (CAD) on a surprise downgrade of the US government's credit rating late on Friday and renewed trade tensions. Traders will keep an eye on the Canadian Consumer Price Index (CPI) inflation data, which is due later on Tuesday.
Moody’s downgrade of America’s sovereign rating to ‘AA1’ from ‘AAA,’ along with rising expectations that the Federal Reserve (Fed) will soon start cutting rates amid cooling US inflation, have eroded the US Dollar’s (USD) appeal. The downgrade underscores growing concerns over fiscal deterioration and tariff-induced distortions under US President Donald Trump.
Fed officials maintain caution and call for more clarity before committing to policy changes, which caps the upside for the USD. The markets are now pricing in a nearly 91.6% odds of rates holding at 4.25%–4.50% in the June meeting and a 65.1% chance of no change in July, according to the CME FedWatch tool.
Meanwhile, 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.
Nonetheless, dovish expectations for the Bank of Canada (BoC) after lackluster April job gains and a rise in unemployment might weigh on the CAD and create the pair’s downside. Capital Economics analysts said that US tariffs are finally weakening the Canadian economy, increasing the likelihood of BoC rate reductions at an aggressive pace.
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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