USD/CAD edges higher to near 1.4350 amid weakening investor sentiment
- USD/CAD finds support as the US Dollar strengthens on safe-haven demand amid escalating global trade tensions.
- Fed Chair Jerome Powell admitted the challenges in assessing the broader inflationary impact of tariffs.
- The Canadian Dollar remains under pressure as investor sentiment weakens due to political uncertainty in Canada.
USD/CAD attempts to recover from recent losses, trading around 1.4330 during Asian hours on Friday. The pair may find support as the US Dollar (USD) strengthens on safe-haven demand amid rising global trade tensions driven by US tariff policies.
Federal Reserve (Fed) Chair Jerome Powell downplayed the inflationary impact of tariffs, calling it temporary but acknowledged the broader economic uncertainty. While recession risks have increased, Powell suggested they remain relatively low.
On the data front, US Initial Jobless Claims rose to 223K for the week ending March 15, slightly missing the 224K estimate and exceeding the previous week’s revised 221K figure. Meanwhile, the Philadelphia Fed Manufacturing Survey for March declined to 12.5 from February’s 18.1, marking a second consecutive monthly drop but remaining above the expected 8.5.
The Canadian Dollar (CAD) faces pressure amid weakening investor sentiment, influenced by political uncertainty in Canada. Reports suggest new Prime Minister Mark Carney may call a snap election on April 28, raising concerns over policy stability.
Additionally, investor sentiment has been dampened by US President Donald Trump’s tariff threats on Canadian imports, alongside existing duties on steel and aluminum. Furthermore, the Bank of Canada’s (BoC) recent rate cut to 2.75% has widened the interest rate differential with the Fed, driving capital outflows.
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.