The USD/CAD pair fell on Tuesday and looks to extend the previous day’s late correction pullback from the 1.3815 area, or its highest level since December 11. However, spot prices managed to hold above the mid-1.3700s during the first half of the European session and are currently trading almost unchanged on the day amid mixed signals.
The US dollar continues to decline overnight from its highest level in nearly four weeks amid growing bets on further interest rate cuts by the US Federal Reserve, supported by mixed US PMIs on Monday for December. Aside from this, concerns over central bank independence under US President Donald Trump’s administration, coupled with a generally positive risk tone, weigh further on the safe haven currency. This in turn is seen as a major factor putting some pressure on the USD/CAD pair.
Aside from this, the hawkish signal from the Bank of Canada (BoC) appears to be offering some support to the Canadian Dollar (CAD), contributing to the tone displayed surrounding the currency pair. Meanwhile, expectations that US control of Venezuelan oil would likely lead to increased global supplies offset geopolitical tensions and failed to help crude oil prices benefit from Monday’s recovery from a two-week low. This undermines the commodity-linked Canadian dollar and supports the USD/CAD pair.
Traders may also refrain from placing aggressive directional bets and choose to wait for important US economic releases this week, including the closely watched Non-Farm Payrolls (NFP) report on Friday. Important data could provide further signals about the path of interest rate cuts by the Fed and influence the dynamics of US dollar prices. Aside from this, monthly Canadian employment details, also due on Friday, should provide some important momentum for the Canadian dollar and determine the course of the USD/CAD in the near term.
Frequently asked questions about the Canadian dollar
The main factors that move 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 moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
