USD/CAD sits near multi-week top, below mid-1.4400s ahead of US PCE Price Index

USD/CAD attracts buyers for the sixth straight day amid the ongoing USD recovery.
Concerns about Trump’s tariffs and softer Oil prices further undermine the Loonie.
Traders await the release of the US PCE data before placing fresh directional bets.

Haresh Menghani FXStreet

The USD/CAD pair builds on the previous day's breakout momentum above the 50-day Simple Moving Average (SMA) and gains positive traction for the sixth successive day on Friday. The momentum lifts spot prices to a near four-week top, around the 1.4450-1.4455 area during the Asian session, and is sponsored by some follow-through US Dollar (USD) buying.

The second reading of the US Gross Domestic Product (GDP) released on Thursday showed that inflationary pressures continue to rise. Apart from this, worries that US President Donald Trump's policies would reignite inflation suggest that the Federal Reserve (Fed) will stick to its hawkish stance. This assists the USD Index (DXY), which tracks the Greenback against a basket of currencies, in prolonging this week's recovery move from over a two-month low and acts as a tailwind for the USD/CAD pair.

Furthermore, concerns about the economic fallout from Trump's tariff plans weigh on the Canadian Dollar (CAD) and also lend support to the currency pair. In fact, Trump confirmed that his proposed tariffs on Canada and Mexico would come into effect on March 4, as scheduled. This, along with a modest downtick in Crude Oil prices, undermines the commodity-linked Loonie and provides an additional lift to the USD/CAD pair. Traders, however, seem reluctant ahead of the crucial US inflation data.

The US Personal Consumption Expenditure (PCE) Price Index is due for release later during the early North American session and will influence the Fed's interest rate outlook. This, in turn, will play a key role in driving the USD demand in the near term. Apart from this, Oil price dynamics might produce short-term trading opportunities around the USD/CAD pair on the last day of the week. Nevertheless, spot prices remain on track to end on a positive note for the second successive week.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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