- USD/CAD attracts fresh sellers on Thursday and is pressured by a combination of factors.
- The USD bulls remain on the defensive despite the Fed’s hawkish pause on Wednesday.
- Renewed buying around Oil prices underpins the Loonie and weighs on the currency pair.
The USD/CAD pair fails to capitalize on the pervious day’s modest recovery move from the vicinity of the year-to-date low and meets with a fresh supply during the Asian session on Thursday. Spot prices, however, remain confined in a multi-week-old range and currently trade around the 1.3815 region, down 0.15% for the day.
The US Dollar (USD) continues with its struggle to any meaningful buyers amid the heightened economic uncertainty led by US President Donald Trump’s rapidly shifting stance on trade policies. In fact, Trump said that he is in no real hurry to sign any deals and added that he was not open to lowering the 145% tariffs imposed on China to encourage trade negotiations. This, to a larger extent, overshadows the Federal Reserve’s (Fed) hawkish pause on Wednesday, which keeps the USD bulls on the defensive and weighs on the USD/CAD pair.
Meanwhile, Crude Oil prices regain positive traction following the overnight pullback from a one-week high and underpin the commodity-linked Loonie. Apart from this, hopes for a new US-Canada trade deal benefit the Canadian Dollar (CAD) and exert some pressure on the USD/CAD pair. However, the OPEC+ decision to speed up output increases stoked fears of oversupply. This, along with demand concerns on the back of fading hopes for a quick resolution to the US-China trade war, should cap any meaningful upside for Crude Oil prices.
This, in turn, makes it prudent to wait for strong follow-through selling before confirming a fresh breakdown for the USD/CAD pair and positioning for an extension of the recent sharp retracement slide from over a two-decade high touched in February. Traders now look forward to the release of the US Weekly Initial Jobless Claims data for some impetus later during the early North American session. Apart from this, Oil price dynamics should contribute to producing short-term trading opportunities ahead of the Canadian jobs report on Friday.
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.
