- USD/CAD depreciates as Canada’s hot retail sales and inflation data increase the likelihood of a BoC’s steady stance in June.
- The US Dollar extends its losses amid growing US-debt concerns.
- The US deficit could increase by $3.8 billion if Trump's “One Big Beautiful Bill” passes through the Senate floor.
USD/CAD continues its losing streak that began on May 19, trading around 1.3710 during the early European hours on Monday. The Canadian Dollar (CAD) appreciates against the US Dollar (USD) as domestic retail sales rose for a second straight month in April, indicating strength in consumer sentiment despite an aggressive trade war between the United States (US) and Canada.
The stronger retail sales data, along with April’s hot inflation data, raised the expectations of the Bank of Canada (BoC) to hold interest rates in the upcoming June meeting instead of another 25 basis points rate cut. This has provided support for the Canadian Dollar and undermined the USD/CAD pair.
Additionally, the US Dollar struggles amid rising uncertainty surrounding the US economy. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is extending its losses and trading around 98.90.
During the week, Trump's “One Big Beautiful Bill” will go through the Senate floor after the Memorial Day holiday on Monday. The Congressional Budget Office (CBO) noted that Trump’s bill is expected to increase the deficit by $3.8 billion, as it would deliver tax breaks on tip income and US-manufactured car loans.
On Sunday, US Senator Ron Johnson said on CNN, "I think we have enough votes to stop the process until the President gets serious about spending reduction and reducing the deficit.” Johnson added, “My primary focus now is spending. This is completely unacceptable. Current projections are a $2.2 trillion per year deficit.”
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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