USD/CAD extends the rally above 1.4400 on bullish US Dollar
- USD/CAD gathers strength to near 1.4425 in Monday’s Asian session.
- The Fed’s cautious stance and Trump tariff threats support the USD.
- Higher crude oil prices might boost the commodity-linked Loonie.
The USD/CAD pair extends its upside to near 1.4430 during the Asian trading hours on Monday. The potential US trade tariffs drag the Canadian Dollar (CAD) lower against the Greenback. However, the optimism around a likely change in Canadian government and a rise in crude oil prices might cap the downside for CAD.
The upbeat US employment report supported the US Federal Reserve’s (Fed) cautious stance toward rate cuts this year, supporting the USD. The US Nonfarm Payrolls (NFP) rose by 256K in December versus 212K prior (revised from 227K), the US Bureau of Labor Statistics (BLS) reported Friday. This reading came in above the market consensus of 160K. Additionally, the Unemployment Rate edged lower to 4.1% in December from 4.2% in November.
Furthermore, the mounting fears that pledges by President-elect Donald Trump to impose tariffs on imports might could undermine the CAD. ”We are assuming that Trump hits Canada with tariffs this year, which is likely to weigh on the loonie," said Stephen Brown, deputy chief North America economist at Capital Economics.
On Sunday, Canadian Prime Minister Justin Trudeau said that the government isn’t looking for a trade war with the new administration but will have to retaliate if the US puts tariffs on Canadian products. Meanwhile, higher crude oil prices could lift the CAD. It's worth noting that Canada is the largest oil exporter to the United States (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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
