USD/CAD sticks to modest gains above 1.4400, over one-week top ahead of US data

USD/CAD attracts some buyers amid a solid USD bounce from over a one-month low.
Trump’s tariff threats and rebounding US bond yields help revive the USD demand.
A modest recovery in Oil prices underpins the Loonie and caps gains for the major.

Haresh Menghani FXStreet

The USD/CAD pair regains positive traction on Tuesday and climbs to over a one-week high, around the 1.4415 region, during the first half of the European session. Spot prices, however, remain confined in a familiar range held over the past month or so as traders opt to wait on the sidelines ahead of this week's key central bank event risks.

The Bank of Canada (BoC) is scheduled to announce its policy decision on Wednesday and is widely expected to cut interest rates by 25 basis points. This marks a big divergence in comparison to the broader market consensus that the Federal Reserve (Fed) will leave interest rates unchanged at the end of a two-day meeting the same day, which, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair.

Apart from this, a solid US Dollar (USD) recovery from the lowest level since December 18 touched on Monday offers additional support to the currency pair. Investors remain worried that US President Donald Trump's protectionist policies would reignite inflationary pressures. This triggers a fresh leg up in the US Treasury bond yields and revives the USD demand, which, in turn, favors the USD/CAD bulls.

That said, a modest recovery in Crude Oil prices, from a nearly three-week trough set on Monday, helps limit losses for the commodity-linked Loonie and caps the USD/CAD pair. Traders now look forward to the US economic docket – featuring the release of Durable Goods Orders, the Conference Board's Consumer Confidence Index and the Richmond Manufacturing Index – for some impetus later during the US session.

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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