USD/CAD posts modest gains above 1.4350 as traders assess Trump 2.0
- USD/CAD holds positive ground around 1.4380 in Thursday’s early Asian session.
- Trump said his administration was considering 25% tariffs on Mexican and Canadian imports, weighing on the CAD.
- Canada’s CPI inflation boosts the bets for the BoC rate cut in January.
The USD/CAD pair trades with mild gains near 1.4380 during the early Asian session on Thursday. The US weekly initial Jobless Claims will take center stage on Thursday. Also, investors continue to digest the impact of Trump 2.0 ahead of US S&P PMI data for January, which will be published on Friday.
US President Donald Trump said late on Tuesday that he will impose 25% tariffs against Canada and Mexico, as well as duties on China and the European Union, on February 1. Trump’s remarks drag the Canadian Dollar (CAD) lower as Canada is highly dependent on trade with the US, with roughly 75% of its exports heading south. Analysts at Deutsche Bank said they see the CAD to the Greenback as "one of the most under-priced FX crosses for an FX trade war."
Cooling inflation in Canada last month has opened the door to the Bank of Canada (BoC) rate cut in January, contributing to the Loonie’s downside. Data released by Statistics Canada on Tuesday showed that the country’s CPI inflation eased to 1.8% YoY in December from 1.9% in November. This reading was slightly below the 1.9% expected.
Canadian Dollar FAQs
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.