USD/CAD extends the decline to near 1.3850 amid weaker US Dollar
- USD/CAD trades in negative territory near 1.3855 in Thursday’s early Asian session.
- Worries about a ballooning US deficit weigh on the US Dollar.
- The advanced S&P Global Manufacturing and Services PMI reports will be closely watched later on Thursday.
The USD/CAD pair extends its downside to around 1.3855 during the early Asian session on Thursday, pressured by a weaker US Dollar (USD). Investors await the advanced S&P Global Manufacturing and Services PMI reports later on Thursday, followed by the Chicago Fed National Activity Index, the usual Initial Jobless Claims and Existing Home Sales.
The 'Sell America' investment theme continues to undermine the Greenback and drag the pair to the two-week low. The White House put pressure on Republicans on Wednesday, urging lawmakers to quickly approve President Donald Trump’s signature tax bill, adding that a failure to do so would be the “ultimate betrayal.”
"The disappointing auction results ... fit the narrative of weakening demand for U.S. assets and a 'sell America' trade amid fiscal concerns," said Kim Rupert, managing director, global fixed income analysis at Action Economics in San Francisco.
On the other hand, a decline in Crude Oil prices could undermine the commodity-linked Loonie and create a tailwind for the pair. 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.
Market players will keep an eye on the release of US PMI reports, which is due later on Thursday. In case of a stronger-than-expected outcome, this could lift the USD against the Canadian Dollar (CAD) in the near term.
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