USD/CAD remains on the defensive near 1.3700 ahead of BoC rate decision
- USD/CAD softens to near 1.3715 in Wednesday’s early Asian session.
- Persistent tariff tensions weigh on the US Dollar.
- The BoC is expected to hold rates at 2.75% on Wednesday.
The USD/CAD pair remains on the defensive around 1.3715 during the early Asian session on Wednesday. The Canadian Dollar (CAD) edges higher against the Greenback as crude oil prices rise. The Bank of Canada (BoC) interest rate decision and the US ISM Services Purchasing Managers Index (PMI) report will take center stage later on Wednesday.
Concerns over potential tariff threats triggered by US President Donald Trump's administration continue to undermine the US Dollar (USD). Federal Reserve (Fed) officials on Tuesday argued for caution on monetary policy as Trump's trade war continues to inject substantial amounts of uncertainty and the risk of economic weakness into the outlook.
Trump planned to double import tariffs on steel and aluminum, starting on Wednesday. The same day that the Trump administration asked its trade partners to submit their best offers in order to finalize deals before July 8.
Meanwhile, a rally in Crude Oil prices after the report that the OPEC+ kept output hikes unchanged, raising its production by the expected 411K barrels per day (bpd) in July, has provided some support to the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive 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.
The BoC is anticipated to hold its benchmark interest rate at 2.75% at its June meeting on Wednesday as policymakers await further developments on the economy, with at least two more reductions likely this year, according to a Reuters poll. The markets have priced in nearly a 75% odds that the Canadian central bank will leave the rate on hold on Wednesday.
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