- USD/CAD declines further below 1.3900 as the BoC keeps interest rates at 2.75%, as expected.
- BoC Macklem warned that Trump’s tariff policies could impact business investment in Canada.
- Investors await Fed Powell’s speech for fresh guidance on the monetary policy outlook.
The USD/CAD pair extends its downside below 1.3900 during North American trading hours on Wednesday. The Loonie pair weakens further as the Bank of Canada (BoC) leaves its borrowing rates at 2.75%, as expected. This is the first interest rate meeting since June 2024, when the central bank has not reduced interest rates. Till now, the BoC has cut its borrowing rates by 225 basis points (bps).
The BoC has shifted its stance from “dovish” to “hold” as officials seek clarity on how the trade policy by United States (US) President Donald Trump will shape the Canadian economic outlook. “We will proceed carefully and be less forward-looking than usual until the situation becomes clearer,” BoC Governor Tiff Macklem said. He warned that the available data is increasingly pointing to a “considerable slowing in business investment and household spending” in the face of reciprocal tariffs by US President Trump.
Earlier in the day, the USD/CAD pair was already weak as the US Dollar (USD) had retreated after a short-lived recovery move on Tuesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 99.50.
More downside in the US Dollar looks likely amid fears that the US-China trade war could lead to the economy to a recession. US businesses lack the ability to increase their manufacturing facility that could produce a similar amount of goods imported from China. Such a scenario leads to supply issues and results in a slowdown in business activity.
The US-China trade war brewed after Beijing announced counter-tariffs on reciprocal tariffs imposed by Donald Trump on the so-called “Liberation Day”.
Meanwhile, investors await Federal Reserve (Fed) Chair Jerome Powell’s speech at 17:30 GMT for fresh interest rate guidance.
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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