USD/CAD gains to near 1.4360 despite US Dollar declines

USD/CAD rises to near 1.4360 even though the US Dollar slides to four-month low.
US President Trump is set to reprieve tariffs on automobiles from Canada and Mexico.
Investors await the employment data for February from both the US and Canada.

Sagar Dua FXStreet

The USD/CAD pair moves higher to near 1.4360 in Thursday’s European session despite the US Dollar (USD) extends its downside, suggesting significant weakness in the Canadian Dollar (CAD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to a four-month low near 104.00.

The Greenback faces selling pressure as investors expect the tariff agenda of United States (US) President Donald Trump won’t be favorable for the economy in the near term. The impact of higher tariffs is expected to be borne by US importers, which will eventually passed on to end consumers. Such a scenario would reduce the purchasing power of households, resulting in a slowdown in the overall demand structure.

Meanwhile, the Canadian Dollar underperforms has President Trump imposed 25% tariffs on Canada and Mexico on March 4. However, the White House reported on Wednesday that tariffs have been reprieved from automobiles after consulting with three big carmakers.

Market participants expect Trump tariffs to impact Canadian economic growth significantly, knowing that Canada is one of the leading trading partners of the US.

Going forward, investors will focus on the US and Canada employment data for February, which will be released on Friday. The Canadian economy is expected to have added fewer new workers while the US economy is projected to have witnessed a strong labor demand.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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