- USD/CAD marks a fresh multi-year high of 1.4239 on Friday.
- The US Dollar gains ground due to the tariff threats from Trump’s administration.
- The commodity-linked CAD faces challenges due to lower WTI Oil prices.
USD/CAD extends its gains for the second successive session, reaching a fresh multi-year high of 1.4239 during Friday's Asian trading hours, the highest level since April 2020. This upside could be attributed to the tariff threats from Trump’s administration, which have boosted the US Dollar (USD) across the board and created a headwind for risk-sensitive currencies like the Canadian Dollar (CAD).
Additionally, the commodity-linked Canadian Dollar could have faced challenges due to lower crude Oil prices as Canada is the largest crude Oil exporter to the United States (US). West Texas Intermediate (WTI) crude Oil price remains tepid for the second successive session, trading around $69.70 per barrel at the time of writing.
However, the Loonie Dollar may limit its downside as the Bank of Canada (BoC) signaled a slower pace of future interest rate cuts following its recent decision on Wednesday. BoC Governor Tiff Macklem stated, "We anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected." Macklem also highlighted "a major new uncertainty" stemming from potential US tariffs under President-elect Donald Trump.
In the United States, the release of the hotter-than-expected US Producer Price Index (PPI) report on Thursday provided support for the US Dollar. The US PPI jumped 0.4% MoM in November, the largest gain since June, after an upwardly revised 0.3% increase in October. This reading was better than the 0.2% expected.
Traders await the US Federal Reserve (Fed) interest rate decision scheduled next week. Financial markets are now fully pricing in a 25 basis point rate cut on December 18, according to the CME FedWatch Tool.
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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