The USD/CAD pair gathers strength to near 1.3715 during the early Asian trading hours on Tuesday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) despite American trade policy uncertainty. The Canadian Gross Domestic Product (GDP) and the US January Producer Price Index (PPI) reports will be the highlights later on Friday.
Uncertainty around tariffs intensified following US President Donald Trump’s warning that countries should not back away from recently negotiated trade deals with the US after the Supreme Court struck down his emergency tariffs. Trump said that he would impose a blanket 15% levy on imports, which could undermine the Greenback against the CAD.
Persistent geopolitical risks could lift crude oil prices and provide some support to the commodity-linked Loonie. The New York Times reported on Sunday that Trump is considering limited airstrikes on Iran.
He said that if diplomacy or any initial targeted US attack does not lead Iran to give in to his demands that it give up its nuclear program, he will consider a much bigger attack in the coming months. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
Traders will keep an eye on the Canadian GDP data on Friday, which is expected to grow by 0.1% MoM in December. Any signs of weakening in the Canadian economy could weigh on the CAD and act as a tailwind for the pair in the near term.
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.
