The USD/CAD pair recovers some lost ground to near 1.3520 during the Asian trading hours on Friday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) ahead of US President Donald Trump’s Federal Reserve (Fed) chair announcement. The US Producer Price Index (PPI) report will be released later on Friday.
Trump on Thursday threatened to impose a 50% tariff on all aircraft sold from Canada into the United States (US), accusing Canada of unfairly blocking certification of Gulfstream business jets. Renewed trade tensions and uncertainty could weigh on the Loonie and act as a tailwind for the pair in the near term.
Trump said late Thursday that he will announce his choice to replace Jerome Powell as the chair of the Federal Reserve (Fed) on Friday morning, per Bloomberg. Former Fed Governor Kevin Warsh is increasingly seen as the frontrunner following a reported meeting with Trump at the White House. Traders will closely monitor the developments surrounding potential implications for Fed independence and the interest rate outlook.
The Wall Street Journal reported on Thursday that Trump and Senate Democrats struck a deal that could avert a government shutdown and buy more time to negotiate restrictions on the administration’s immigration crackdown. Market concerns eased after this headline, which lifted the Greenback against the CAD.
Nonetheless, it is unclear how quickly the House can and will process those funding bills after the Senate passes them. The shutdown deadline is midnight on Friday. The Greenback’s rebound may prove short-lived if market concerns resume, particularly over the Fed’s independence and the risk of a US government shutdown, which could continue to weigh on the USD.
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.
