USD/CAD approaches multi-week lows at 1.3670 amid growing trade uncertainty
Later
- The US Dollar extends losses for the third day in a row, as trade concerns grow.
- Investors are increasingly wary of the potential impact of higher import costs on the US economy.
- Later today, Fed Powell will speak amid increasing pressures from the government to resign.
The US Dollar extends its reversal against the Canadian Dollar for the third consecutive day on Tuesday, and is approaching 10-day lows at the 1.3670 area, amid broad-based USD weakness as concerns about tariffs grow.
The Greenback is depreciating against most peers on Tuesday, with investors increasingly wary about the potential impact of Trump’s tariffs on the US economy. The August 1 deadline approaches, and there are no significant advances in the trade negotiations with key partners such as the European Union or Japan.
Fed Powell speaks amid increasing pressures to resign
The calendar is void today, but later on the day Fed Powell will speak at an economic event in Washington. The Fed Chairman is not expected to speak about monetary policy as the bank is on the blackout that precedes every interest rate decision, but he might defend the bank’s independence in the face of unprecedented attacks from the Government.
Rumours about the possibility that Trump fires Powell seem to have abated, although the US President has kept calling for his resignation and some lawmakers are accusing him of fraud due to overrun costs of the bank headquarters’ renovation.
The Canadian Dollar, on the other hand, might struggle to rally further with Crude prices depressed near 1, ½ month lows. Crude Oil is Canada´s main export, and the deteriorating outlook for global demand, amid restricted trade activity, will, sooner or later, harm the Canadian Dollar.
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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