USD/CAD posts modest gains above 1.4300, eyes on US PCE release
- USD/CAD trades with mild gains around 1.4310 in Thursday’s late American session.
- Trump placed a 25% tariff on imported cars and light trucks, which will take effect on April 2.
- US GDP grew at a 2.4% annualized rate in the October-to-December period.
The USD/CAD pair posts modest gains near 1.4310 during the late American session on Thursday. The Canadian Dollar (CAD) weakens after US President Donald Trump announced auto trade levies, widening the global trade war. Investors await the release of the US Personal Consumption Expenditures Price Index (PCE), which is due later on Friday.
Trump on Wednesday signed a proclamation to implement a 25% tariff on auto imports and pledged harsher punishment on the EU and Canada if they join forces against the US. This development undermines the Loonie and acts as a tailwind for the pair as Canada sends about 75% of its exports to the United States, including oil and autos. Trump's aggressive trade measures look certain to worsen relations with major trading partners, even before his planned so-called reciprocal tariffs on April 2.
The US economy expanded at an annual 2.4% pace in the final three months of 2024, supported by a year-end surge in consumer spending, the third release of the figures from the Bureau of Economic Analysis showed Thursday. This figure came in slightly better than the previous estimate of fourth-quarter growth. However, the outlook is cloudier as Trump’s trade policies could push up inflation and hurt growth. This, in turn, might exert some selling pressure on the Greenback against the CAD.
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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