USD/CAD flat lines near 1.3600, traders brace for US PMI/ Canadian Retail Sales data
- USD/CAD trades flat around 1.3600 in Thursday’s early Asian session.
- Risk-on sentiment from new US trade deal supports the Canadian Dollar.
- The flash US July PMI and Canadian May Retail Sales reports will be released later on Thursday.
The USD/CAD pair holds steady near 1.3600 during the early Asian session on Thursday. However, positive sentiment from a new US trade deal could improve the global economic outlook and lift the Canadian Dollar (CAD). The preliminary reading of US Purchasing Managers Index (PMI) reports for July and Canadian Retail Sales data for May will be the highlights later on Thursday.
The Financial Times reported that the EU and the US are closing in on a deal that would impose 15% tariffs on EU goods imported into the US. Progress in US–EU trade negotiations adds to the positive mood and boosts riskier assets like the CAD.
Meanwhile, investors will closely monitor trade agreements between the US and Canada. Canadian Prime Minister Mark Carney said earlier this week that the country "will not accept a bad deal" with the US, as a deadline of 1 August looms before US President Donald Trump begins to impose new tariffs.
On the other hand, a decline in Crude Oil prices could undermine the commodity-linked Loonie and create 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 Canadian Retail Sales data for May, due later on Thursday, which is expected to decline 1.1%. Still, analysts expect the Bank of Canada (BoC) to keep its benchmark interest rate unchanged at 2.75% next week, following recent data that showed underlying inflation remaining well above target.
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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