USD/CAD languishes near YTD low, seems vulnerable around 1.3670-1.3665 region
- USD/CAD struggles to register any meaningful recovery amid a combination of factors.
- An uptick in Oil prices underpins the Loonie and overshadows modest USD strength.
- Hope for a US-Canada trade deal further benefits the CAD and weighs on the major.
The USD/CAD pair extends its bearish consolidative price action heading into the European session on Thursday and currently trades around the 1.3670-1.3665 area, just above the lowest level since October 2024 touched the previous day. Meanwhile, the fundamental backdrop seems tilted in favor of bearish traders and suggests that the path of least resistance for spot prices remains to the downside.
Reports that a trade deal between the US and Canada could happen before the G7 Summit on June 15, along with the Bank of Canada's (BoC) decision to keep interest rates steady on Wednesday, might continue to underpin the Canadian Dollar (CAD). Adding to this, a modest uptick in Crude Oil prices could benefit the commodity-linked Loonie and validate the negative outlook for the USD/CAD pair amid the underlying bearish sentiment surrounding the US Dollar (USD).
Traders lifted bets that the Federal Reserve (Fed) will cut interest rates at the September policy meeting following Wednesday's weaker-than-expected US economic releases. This led to the overnight slide in the rate-sensitive two-year and the benchmark 10-year US Treasury yields to the lowest level since May 9. Furthermore, concerns about the worsening US fiscal conditions and persistent trade-related uncertainties should contribute to capping any meaningful USD appreciation.
The aforementioned negative factors suggest that any attempted recovery could be seen as a selling opportunity and remain capped. Traders now look to the release of US Weekly Initial Jobless Claims, which, along with speeches from influential FOMC members, will drive the USD demand. Apart from this, Oil price dynamics should produce short-term opportunities around the USD/CAD pair in the run-up to the crucial monthly employment details from the US and Canada.
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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