USD/CAD remains on the defensive below 1.3750 as the 'Sell America' theme continues
- USD/CAD weakens to around 1.3735 in Tuesday’s early Asian session.
- The US Dollar extends the decline as the 'Sell America' theme continues.
- BoC rate cut expectations unchanged despite upbeat Canadian Retail Sales data.
The USD/CAD pair remains on the defensive near 1.3735 during the early Asian session on Tuesday. The US Dollar weakens against the Canadian Dollar (CAD) as investors turn away from US assets. Traders will keep an eye on the Conference Board’s Consumer Confidence report due later on Tuesday, followed by Durable Goods Orders and the Dallas Fed Manufacturing Index.
"The 'Sell America' theme is growing among investors after Moody's downgraded the creditworthiness of the US due to the mounting US national deficit. The downgrade, the budget bill, and the ongoing economic uncertainty triggered by US President Donald Trump's tariffs weigh on the USD broadly.
"The 'Sell America' theme, which obviously was the dominant theme back in April, is back on show," said Ray Attrill, head of FX research at National Australia Bank.
Despite the upbeat Canadian Retail Sales in March, expectations for a rate cut from the Bank of Canada (BoC) in June have remained unchanged. Currency swap markets have priced in a 32% odds of a 25 basis points (bps) rate reduction by the BoC in the June meeting, according to Bloomberg.
Meanwhile, a decline in Crude Oil prices could weigh on the commodity-linked Loonie and help limit the pair’s losses. 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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