USD/CAD holds steady below 1.4200 ahead of Canadian CPI release

USD/CAD trades on a flat note around 1.4185 in Monday’s late American session.
Trump keeps the tariff drumbeat going, with autos targeted next.
The Canadian Consumer Price Index (CPI) inflation report will take center stage on Tuesday.

Lallalit Srijandorn FXStreet

The USD/CAD pair flat lines near 1.4185 during the late American session on Monday. The US Dollar Index (DXY) trades sideways amid the inactivity in the US markets due to the Washington’s Day holiday. Traders will keep an eye on the Canadian Consumer Price Index (CPI) inflation data, which is due later on Tuesday.

On Friday, US President Donald Trump maintained his drumbeat of tariff threats, stating that taxes on autos will begin as soon as April 2. It was the latest in a series of trade measures he has announced since taking office for the second time. Investors will closely monitor the developments surrounding further tariff policies. Any signs of escalating trade tensions could boost the US Dollar (USD) against the Canadian Dollar (CAD).

On the Loonie front, the Canadian CPI data will be in the spotlight on Tuesday. The headline CPI is expected to show an increase of 1.8% YoY in January. On a monthly basis, the CPI inflation is projected to rise to 0.1% in January from a decline of 0.4% in December. In case of a softer-than-expected inflation outcome, this could drag the CAD lower and create a tailwind for the pair.

However, a rise in crude oil prices might help limit the commodity-linked Loonie’s losses. 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

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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