The US dollar extends its reversal from Friday’s highs of 1.3928 against the Canadian dollar, hitting session lows just below 1.3900 in the European session on Monday. US President Donald Trump’s announcement of a new round of trade tariffs has a significant impact on the dollar.
Trump shook the markets over the weekend, when he announced a new round of trade tariffs against European countries, in response to their decision to oppose US plans to annex Greenland. European leaders have signaled retaliatory measures, and the US dollar fell across the board on Monday, dragged down by renewed concerns about the economic consequences of Trump’s erratic trade policies.
The weaker dollar offsets the negative impact of weak oil prices on the commodity-sensitive Canadian dollar. Benchmark West Texas Intermediate crude oil has regained earlier gains and is trading at a one-week low, near $58.70, at the time of writing, more than 5% below last week’s peak of $62.19.
Tensions between the United States and Iran have eased as Tehran’s crackdown on protests fades into the rearview mirror and the focus shifts to Greenland. This has eased upward pressure on crude oil prices and is likely to weigh on the Canadian dollar’s gains.
With the US market closed for Martin Luther King Jr. Day, investors will pay attention to Canada’s Consumer Price Index, which is expected to contract at a rate of 0.3% in December, after growth of 0.1% in November, while the year-on-year rate is expected to grow at a rate of 2.2%, unchanged from the previous month.
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.
