USD/CAD softens to near 1.3800 ahead of US PCE, Canadian GDP releases
- USD/CAD weakens to around 1.3810 in Friday’s early Asian session.
- US Initial Jobless Claims increased to 240K last week.
- The US PCE inflation and Canadian GDP reports will be the highlights later on Friday.
The USD/CAD pair trades in a negative territory around 1.3810 during the early Asian session on Friday. The concerns that a US court ruling would change the outlook for US tariffs weigh on the Greenback. Investors will closely monitor the US April Personal Consumption Expenditures (PCE) Price Index and the Canadian Gross Domestic Product (GDP) data, which are due later on Friday.
A federal appeals court late Thursday temporarily paused a sweeping ruling against US President Donald Trump’s global tariffs while it takes more time to consider the administration’s request for a longer-lasting hold. The Trump administration’s unpredictable policy could exert some selling pressure on the US Dollar (USD) against the Canadian Dollar (CAD) in the near term.
Furthermore, the downbeat US economic data, including US Initial Jobless Claims, drag the USD lower. The number of Americans filing new applications for jobless benefits for the week ending May 24 climbed to 240K, compared to the previous week of 226K (revised from 227K), the US Department of Labor (DOL) showed on Thursday. This figure came in above the market consensus of 230K.
Meanwhile, a decline in Crude Oil prices might undermine the commodity-linked Loonie and help limit the pair’s losses. 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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