Canadian Dollar declines as Fed shift lifts USD/CAD
- USD/CAD rises as the US Dollar gains following the release of robust US Retail Sales data.
- US Retail Sales grew 0.5% month-over-month in April, beating expectations.
- The Canadian Dollar may advance amid rising oil prices, driven by US-China trade optimism.
USD/CAD extends its winning streak for the eighth straight day, trading around 1.3740 during the Asian hours on Friday. The US Dollar (USD) trends higher against its major peers following the release of robust US Retail Sales data, which grew by 0.5% month-over-month in April. This performance underscores the resilience of American consumer spending even in the face of elevated borrowing costs.
The Greenback found further support in shifts within the Federal Reserve (Fed) leadership; the resignation of Stephen Miran from the Board of Governors has paved the way for Kevin Warsh to take over as Fed Chair.
These domestic factors, combined with surging inflation linked to ongoing Middle East tensions, have reinforced market expectations that the Federal Reserve will maintain high interest rates for an extended period or perhaps even implement further hikes.
Despite the broad strength of the USD, risk-sensitive pairs like USD/CAD are facing downward risks due to improving geopolitical relations in Asia. Positive developments from the meeting between US President Donald Trump and Chinese President Xi Jinping in Beijing have buoyed market sentiment.
President Trump expressed optimism on Thursday, stating his hope for a bilateral relationship that is "stronger and better than ever before," while also noting that President Xi offered assistance in de-escalating the Iran conflict. This shift toward diplomacy has provided a boost to risk appetite, which traditionally acts as a headwind for the US Dollar’s safe-haven dominance.
However, the upside of the USD/CAD pair could be restrained as the Canadian Dollar (CAD) may receive support from improving oil prices. As Canada’s primary export to the United States (US), crude oil prices heavily dictate the CAD's trajectory. Oil prices have recovered their daily losses after US President Donald Trump told Fox that China will buy US farm goods and oil via specific ports, as oil prices rose.
However, the Canadian Dollar may remain vulnerable as market anxiety stays elevated; the recent history of ship seizures and attacks in the region ensures that the "risk premium" on oil remains volatile, keeping the commodity-linked currency on the defensive.
The story was corrected on May 15 at 02:40 GMT to say in the fifth paragraph that oil prices have recovered their daily losses instead of lower oil prices. Title and first bullet point have also been corrected.)
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
