The USD/CAD pair drifts lower for the second consecutive day on Thursday and moves away from the monthly peak, touched earlier this week. Spot prices currently trade around the 1.3665 region, down nearly 0.20% for the day, though the downside seems limited ahead of the crucial US-Iran nuclear talks.
The US Dollar (USD) remains on the defensive amid renewed turbulence over US President Donald Trump’s trade policies and turns out to be a key factor exerting downward pressure on the USD/CAD pair. In fact, Trump announced a new framework and signaled that his trade agenda remains firmly intact following the Supreme Court verdict against his sweeping tariffs last Friday.
In his State of the Union Address, Trump said on Wednesday that the White House pivoted to temporary global tariffs of 10% for 150 days under Section 122 and added that the administration is working toward raising duties to 15%. This fuels worries about retaliatory measures and the potential economic fallout from disruptions to global supply chains, undermining the Greenback.
Apart from this, a generally positive tone around the equity markets further dents the USD’s safe-haven status and turns out to be another factor weighing on the USD/CAD pair. Meanwhile, Crude Oil prices consolidate near the weekly low on the back of a large build in the US stock. However, the threat to oil supply from the potential US-Iran military conflict supports the commodity.
Subdued Crude Oil prices do little to provide any meaningful impetus to the commodity-linked Loonie, which, in turn, might hold back traders from placing aggressive bearish bets around the USD/CAD pair. Hence, it will be prudent to wait for strong follow-through selling before confirming that the recent goodish recovery from the monthly low has run out of steam already.
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.
