USD/CAD holds steady above 1.3770, Carney announces support measures for lumber industry

USD/CAD trades flat around 1.3770 in Wednesday’s early Asian session.
Canada’s trade deficit widened to C$5.85 billion in June.
The US ISM Services PMI eased to 50.1 in July, weaker than expected.

Lallalit Srijandorn FXStreet

The USD/CAD pair flat lines near 1.3770 during the early Asian session on Wednesday. The Canadian Dollar (CAD) trades unchanged against the Greenback as crude oil prices decline and data showed the Canadian trade deficit came in close to expectations. The Federal Reserve (Fed) officials are set to speak later on Wednesday, including Susan Collins, Lisa Cook and Mary Daly.

Data released by Statistics Canada on Tuesday showed that the country’s International Trade Deficit arrived at C$5.86 billion in June, compared to C$5.9 billion in May. Analysts had predicted the deficit would decrease to C$5.8 billion.

Canadian Prime Minister Mark Carney stated on Tuesday that the government would extend favorable loan guarantees to the Canadian softwood lumber industry, which is dealing with tariff impacts that are dragging down exports to the US.

Meanwhile, crude oil prices fall on rising OPEC+ supply and worries of weaker global demand, which might weigh on the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.

On the other hand, the rising expectation of Fed rate cuts this year and weaker-than-expected US economic data might cap the upside for the pair in the near term. The US Services Purchasing Managers Index (PMI) declined to 50.1 in July, down from 50.8, according to the Institute for Supply Management (ISM) on Tuesday. This figure came in worse than the estimations of 51.5.

Financial markets have priced in nearly an 84% odds that the Fed will reduce rates by 25 basis points (bps) in the September meeting, according to the CME FedWatch tool.

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

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.

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