- The Canadian Dollar slipped 0.5% higher on Wednesday.
- The Bank of Canada delivered a broadly-expected 25 bps rate cut.
- Trade war concerns continue to boil away on the back burner.
The Canadian Dollar (CAD) recovered some ground on Wednesday, bolstered by a general easing in Greenback market flows. The Loonie gained roughly one-half of one percent against the US Dollar, pushing USD/CAD back down below the 1.4400 handle.
The Bank of Canada (BoC) delivered another quarter-point rate cut despite the overarching threat of a trade war with the US spiraling out of control, as the Canadian central bank races to prop up the off-kilter Canadian economy ahead of a prolonged spat over tariffs with US President Donald Trump. US Consumer Price Index (CPI) inflation figures cooled faster than expected in February, helping to ease overall market tensions somewhat, but investors remain tepid after the US imposed a global 25% tariff on all steel and aluminum imported into the US.
Daily digest market movers: Markets recover balance, but trade war fears continue to simmer
- The Canadian Dollar clawed back around one-half of one percent on Wednesday, dragging USD/CAD back down to the 1.4350 range, a familiar congestion level for Loonie traders.
- US CPI inflation eased slightly in February, helping to batten down a resurgence in inflation concerns sparked by an unexpected uptick in price pressures in January.
- The BoC trimmed its main reference rate by 25 bps, to 2.75%. Further rate cuts will become increasingly more difficult to deliver as the US’s trade war with all of its closest trading partners continues to ramp up.
- US President Donald Trump reminded markets that he still intends to do another batch of tariffs in April. Another ‘defensive’ tariff is also expected in the near future on copper.
- Incoming Canadian Prime Minister Mark Carney, who is slated to replace incumbent PM Justin Trudeau, noted that he’s ready to talk with the US administration, but on his terms.
Canadian Dollar price forecast
The Canadian Dollar’s mid-week rebound puts the USD/CAD chart back into dread territory as the lack of a prevailing trend leaves the Loonie pairing exposed to continued whipsaw conditions. A demand zone 1.4440 and 1.4480 has priced in a firm technical ceiling, while technical support from the sub-1.4300 region has put a firm floor just beneath price action.
USD/CAD daily chart
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.
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