USD/CAD advances to near 1.3800 despite improved risk sentiment, Fed decision awaited
- USD/CAD rises as investors adopt a cautious stance ahead of the Fed interest rate decision.
- US Treasury Secretary Bessent and Trade Representative Greer are set to meet with Chinese Vice Premier He Lifeng in Geneva.
- Risk sentiment improved following a joint press conference between Canadian PM Mark Carney and US President Donald Trump.
USD/CAD is recovering its losses registered in the previous session, trading around 1.3790 during the Asian hours on Wednesday. The US Dollar (USD) is gaining strength as investors adopt a cautious stance ahead of the Federal Reserve's (Fed) interest rate decision due later in the North American session.
While the Fed is widely expected to leave rates unchanged, market focus remains on Chair Jerome Powell’s comments, particularly in light of ongoing tariff uncertainties and mounting political pressure from President Trump for rate cuts.
US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet Chinese Vice Premier He Lifeng in Geneva this weekend, marking the first high-level dialogue since US-imposed tariffs intensified global trade tensions. China's Ministry of Commerce confirmed participation after evaluating US proposals and factoring in national interests, global sentiment, and domestic industry input.
On the other hand, the USD/CAD pair faced headwinds as the Canadian Dollar (CAD) found support amid improved risk sentiment following a joint press conference between Canadian Prime Minister Mark Carney and a visibly tense US President Donald Trump. Carney later held a solo briefing, clarifying the tone of initial US-Canada trade discussions.
"The talks were constructive," Carney noted. "President Trump and I agreed to resume discussions in the coming weeks, with a follow-up meeting at the G7. While no decisions were made on tariffs today, both sides are committed to moving forward."
However, domestic data remains a concern for the CAD. Canada’s seasonally-adjusted Ivey PMI for April fell sharply below expectations, dropping to 48.0 versus a forecast of 51.2, signaling deteriorating business sentiment.
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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