USD/CAD rebounds above 1.3800, FOMC Minutes in focus
- USD/CAD trades with mild gains around 1.3805 in Wednesday’s early Asian session.
- The US CB Consumer Confidence Index improved to 98.0 in May.
- Traders brace for the Canadian Q1 GDP report due on Friday, which is estimated to decline to 1.7% YoY from 2.6%.
The USD/CAD pair posts modest gains near 1.3805 during the early Asian session on Wednesday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) after the stronger US Consumer Confidence data. The attention is shifted to the FOMC Minutes, which are due later on Wednesday.
The Conference Board's Consumer Confidence Index rose to 98.0 in May from 86.0 (revised from 85.7). This reading suggested a growing optimism among US consumers, which lifts the USD broadly. Meanwhile, US Durable Goods Orders declined by 6.3% in April versus a 7.6% increase prior (revised from 9.2%), the US Census Bureau showed on Tuesday. This figure came in better than the estimated decrease of 7.9%.
Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari said on Tuesday that the officials should keep interest rates steady until there is more clarity on how higher tariffs affect inflation, warning against "looking through" the impact of such supply price shocks.
Additionally, a decline in Crude Oil prices undermines the commodity-linked Loonie and creates 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.
Traders will keep an eye on the release of the Canadian Gross Domestic Product (GDP) report for the first quarter (Q1), which is estimated to decline to 1.7% YoY from 2.6%. Nonetheless, a surprise upside in the GDP figure could boost the CAD in the near term.
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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