- USD/CAD climbs amid renewed trade optimism following encouraging progress in US-China trade talks.
- A joint statement confirmed the US will suspend 24 percentage points of tariffs on Chinese goods for an initial 90-day period.
- The CAD remains subdued as Canada’s unemployment rate rose more than expected in April.
USD/CAD continues its upward momentum for the fourth consecutive session, trading around 1.3980 during European hours on Monday. The US Dollar Index (DXY), which tracks the US Dollar (USD) against a basket of six major currencies, is also on the rise, hovering near 101.60 at the time of writing.
The US Dollar (USD) strengthened following a joint statement released after high-level trade negotiations held over the weekend in Geneva, Switzerland. The statement suggested that the United States will suspend 24 percentage points of tariffs on Chinese imports for an initial period of 90 days.
US Treasury Secretary Scott Bessent emphasized the significance of the agreement, citing a 90-day freeze on tariff escalation and a notable 115% reciprocal reduction in tariffs. US Trade Representative Jamieson Greer acknowledged that the previous embargo strategy was unsustainable, reiterating both nations’ commitment to the temporary pause, although he noted that the fentanyl issue remains unresolved.
Attention now turns to key US economic data, with consumer inflation figures set for release on Tuesday, followed by Retail Sales and the Producer Price Index (PPI) on Thursday. Investors will closely watch these reports to assess the early impact of the easing trade tensions on the broader US economy.
Meanwhile, the Canadian Dollar (CAD) is under pressure following the release of Canada’s April labor market data. The unemployment rate rose more than expected, climbing to 6.9% from 6.7% in March and surpassing the 6.8% forecast. This marks the highest jobless rate since October 2021. The uptick in unemployment has fueled speculation that the Bank of Canada (BoC) may need to resume its monetary easing cycle, which was paused in its last policy meeting.
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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