USD/CAD gathers strength to near 1.3650 as Canada's Retail Sales shrink
- USD/CAD strengthens to near 1.3645 in Friday’s early Asian session.
- Canadian Retail Sales fell by 1.1% MoM in May, weighing on the Canadian Dollar.
- Renewed concerns about the Trump administration and the Fed might cap the upside for the pair.
The USD/CAD pair edges higher to around 1.3645 during the early Asian session on Friday. Disappointing Canadian economic data weighs on the Canadian Dollar (CAD) against the Greenback. The US Durable Goods Orders for June will be released later on Friday.
Data released by Statistics Canada on Thursday revealed that the country’s Retail Sales declined by 1.1% MoM in May versus 0.3% prior. This figure aligned with expectations. Economists closely monitor Retail Sales as they offer insight into GDP trends. Investors are concerned about the timing and magnitude of tariffs threatened by US President Donald Trump, which brought forward purchases. The Loonie has weakened as Retail Sales data showed that the domestic economy is softening.
Additionally, investors remain cautious as a deadline of August 1 looms before US President Donald Trump begins to impose new tariffs. Canadian Prime Minister Mark Carney said earlier this week that the country "will not accept a bad deal" with the US.
On the USD’s front, Trump added to pressure on Federal Reserve (Fed) Chair Jerome Powell with a visit to the Fed's Washington offices. Trump and Powell discussed the costs of ongoing renovations at the Fed's headquarters. Any surprise move that escalates tensions between the administration and the Fed or renewed concerns over the Fed’s independence could drag the US Dollar (USD) lower in the near term.
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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