USD/CAD gathers strength above 1.3850 as Fed remains in wait-and-see mode
- USD/CAD gains momentum to around 1.3885 in Thursday’s early European session.
- Fed’s Powell signaled that central bank is in no hurry to move interest rates lower.
- BoC maintained its policy rate at 2.75% at its April meeting on Thursday.
The USD/CAD pair strengthens to near 1.3885 during the early European session on Thursday. Hawkish remarks from Federal Reserve (Fed) Chair Powell and stronger Retail Sales provide some support for the Greenback. Trading volume is likely to be lightened ahead of the Good Friday holiday.
The Fed’s Powell acknowledged on Wednesday that escalating tariffs could fuel inflation while undermining growth, complicating the path for interest rate decisions. Powell noted, “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” His comments reduced the likelihood of a Fed rate reduction in June, which lifts the US Dollar (USD) against the Canadian Dollar (CAD).
The Bank of Canada (BoC) on Wednesday held the overnight rate unchanged for the first time since beginning its easing cycle last June. The BoC emphasized the weakening economic environment, including a deceleration in Canadian consumer and economic uncertainty. The markets had priced in a 50% chance that the BoC will return to easing at its next policy decision at the June meeting and expect two further reductions in total by year-end, according to a Bloomberg survey.
Meanwhile, a recovery in Crude Oil prices could underpin the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
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.