USD/CAD trades with mild losses near 1.3600 as US, Canada to resume trade talks
- USD/CAD posts modest losses around 1.3605 in Tuesday’s early Asian session.
- US and Canada to resume trade talks after Ottawa drops digital tax.
- Canada's government expects to reach an economic deal with the US by July 21.
The USD/CAD pair trades with mild losses near 1.3605 during the early Asian session on Tuesday. The Canadian Dollar (CAD) strengthens against the US Dollar as trade negotiations between the United States and Canada resume. Traders will keep an eye on the US June ISM Manufacturing Purchasing Managers Index (PMI) data, which is due later on Tuesday. The Canadian stock market will be closed on Tuesday for Canada Day.
On Monday, White House economic advisor Kevin Hassett said that the US would immediately begin trade talks with Canada after the latter removed its digital services tax, which targeted US technology companies. Canada suspended its plans to begin collecting a new digital services tax targeting US technology firms just hours before this was due to start on Monday in a bid to advance stalled trade negotiations with the US.
Canada's finance ministry said that Canadian Prime Minister Mark Carney and US President Donald Trump would resume trade negotiations in order to agree on an agreement by July 21. The positive development surrounding trade talks provides some support to the CAD and creates a headwind for the pair.
Meanwhile, Crude Oil prices as investors weighed easing Middle East risk and prospects of an OPEC+ output increase in August. This, in turn, could weigh on the commodity-linked Loonie lower and cap the downside 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.
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