USD/CAD extends the rally to near 1.4450, eyes on US PCE release
- USD/CAD extends its upside near 1.4440 in Thursday’s early Asian session.
- Canadian Dollar hits three-week low as tariff reprieve hopes fade
- US GDP expanded by 2.3% in Q4 as initially estimate.
The USD/CAD pair extends the rally to around 1.4440 on a stronger US Dollar (USD) during the late American session on Thursday. The Canadian Dollar (CAD) weakens to a three-week low as US President Donald Trump said that tariffs on Canadian goods will go into effect on March 4, clearing up some confusion on the timing and dashing hopes of a reprieve.
Trump said that his proposed 25% tariffs on Mexican and Canadian goods will go into effect next week as scheduled because drugs are still pouring into the US from those countries. On Wednesday, Trump's comments on the matter seemed to suggest that he may push the deadline back for about one month until April 2.
Meanwhile, Crude oil prices fall to a two-month low, raising supply concerns as prospects for a peace deal between Russia and Ukraine are improving. This, in turn, undermines the commodity-linked Loonie as Canada is the largest oil exporter to the United States (US), and lower crude oil prices tend to have a negative impact on the CAD value.
Data released by the US Bureau of Economic Analysis (BEA) on Thursday revealed that the US Gross Domestic Product (GDP) expanded at an annual rate of 2.3% in the fourth quarter (Q4). This figure came in line with market expectations.
The release of PCE data will take center stage along with Personal Income/Spending and the Chicago PMI. In case of weaker-than-expected, this could boost the Greenback against the Loonie.
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.