USD/CAD strengthens above 1.3850 on trade deal uncertainty
- USD/CAD gains ground to around 1.3855 in Wednesday’s early Asian session.
- Weaker Canadian economic data and ongoing tariff uncertainty weigh on the Canadian Dollar.
- US job growth was far less robust in the year through March than previously reported.
The USD/CAD pair extends the rally to near 1.3855 during the early Asian session on Wednesday. The Canadian Dollar (CAD) weakens against the US Dollar (USD) as trade worries put pressure on Canada’s economy. All eyes will be on the US Producer Price Index (PPI) inflation data, which is due later on Wednesday.
An uncertain outlook for the Canadian economy supported recent moves by investors to increase bearish bets on the Loonie. Friday’s Canadian job data showed that US tariffs pressured slow hiring momentum and tightened activity across key sectors. The Unemployment Rate in Canada ticked up to 7.1% in August from 6.9% in July, above the expectation of 7.0%.
"While Canada benefits from the CUSMA deal and has one of the lowest effective tariff rates globally, tariffs on other sectors and ongoing uncertainty about a new trade deal with the U.S. continue to dampen the medium-term economic outlook," said Kevin Ford, FX & macro strategist at Convera.
On the other hand, rising expectations that the US Federal Reserve (Fed) will deliver a jumbo rate cut at its September meeting could undermine the Greenback. US job growth came in weaker than expected in the year through March. The number of workers on payrolls will likely be revised down by a record 911K, or 0.6%, according to the preliminary benchmark revision out Tuesday. Traders will take more cues from the US PPI inflation data for August later on Wednesday, ahead of the Consumer Price Index (CPI) report.
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.
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.
